If you’re an investor in or near retirement, you’re probably facing a quandary. Your portfolio likely will need to generate steady income for living expenses. But it also has to ride out market downturns without keeping you up at night…grow enough to last the rest of your life…and outpace inflation, which tends to be higher than average for retirees because of surging health-care costs.
Solution: The All-Dividend Portfolio.
Before I explain what this portfolio is and how it works, here’s what makes it so attractive now. Shaping a retirement portfolio has become even more difficult for investors in recent years. In the past, they were able to accomplish the goals described above with traditional investments such as US Treasuries, corporate bonds and an S&P 500 index fund with shares that would be cashed in occasionally. But in the current financial climate, none of these options is very appealing or effective for income investors.
Here’s why: Interest rates remain so low that you can’t earn substantial income from Treasuries and/or corporate bonds. At the same time, sharp volatility in the late stages of this bull market make it nerve-racking to maintain broad exposure to stocks.
Better solution: I created the All-Dividend Portfolio after working with thousands of retirees and near-retirees. It’s designed to reliably provide an overall yield of 5% to 6% annually throughout bull and bear markets, plus add a few percentage points of capital appreciation annually.
To accomplish this, I use a wide mix of investments that have different approaches to generating income, all of which throw off robust dividends (also known as “distributions,” depending on the investment) and provide a smoother ride than the broad stock market. You may be familiar with some of these assets, such as utilities and blue-chip companies that pay stock dividends. Others are a little less mainstream, including real estate investment trusts (REITs)…preferred stocks…emerging-market bonds…mortgage-backed securities…and closed-end mutual funds. Closed-end funds operate like traditional mutual funds but often sell at discounts relative to their underlying holdings.
These are the current holdings…
Cohen & Steers Limited Duration Preferred and Income (LDP) is a closed-end fund that invests in preferred stocks of high-quality global companies. Preferreds offer steadier income, superior yields and less risk than owning regular shares. If a company runs short on cash, preferred-stock holders get paid dividends before common-stock holders do.
Cohen & Steers REIT and Preferred Income (RNP) is a closed-end fund that splits its investments between preferred stocks and REITs, which own commercial properties and provide income from tenant rents plus capital gains when the properties are sold.
Cohen & Steers Infrastructure (UTF) is a closed-end fund that owns dividend-paying stocks of railroads, construction firms and other businesses that build and operate basic facilities. These businesses have strong, steady cash flow to support their payouts.
DoubleLine Emerging Markets Fixed Income (DLENX) is a traditional bond fund that invests in debt in developing countries such as Chile and India. The bonds are excellent bargains now, with much higher yields than comparable US bonds. They’re fairly safe because the underlying economies of the issuers are strong.
DoubleLine Total Return Bond (DLTNX) is a bond fund that seeks out undervalued mortgage-backed securities, which are composed of large bundles of residential mortgage loans. They tend to provide higher yields than comparable US government bonds.
Reaves Utility Income (UTG) is a closed-end fund focused on dividend-paying electric and gas utilities that throw off reliable income.
Verizon Communications (VZ) is one of the largest US wireless carriers. It has been 60% less volatile than the S&P 500…has increased its dividend annually for the past dozen years…and is a leader in the race to deploy the new-generation 5G communications network.
If you are within five years of retirement,shift from your existing portfolio gradually so that you can have steady dividend income when you retire. Use available cash to invest in new investments. Then sell investments that have performed poorly over the past decade.
If you are in retirement and need dividend income right away, you’ll need to convert as soon as possible.
Spread your new investments across both taxable and tax-deferred accounts, depending on their tax treatment. Stock-heavy holdings that pay “qualified” dividends are better for taxable accounts. Reason: The income is taxed at long-term capital gains rates, which likely will be lower than your ordinary income tax rates. In my All-Dividend Portfolio, these investments include Cohen & Steers Infrastructure…Cohen & Steers Limited Duration Preferred and Income…Reaves Utility Income…and Verizon Communications. The other investments throw off income that’s taxed at your income tax rates. Keep those in tax-deferred accounts (IRAs, 401(k)s) if you expect to be in a lower tax bracket in retirement.
Be prepared to make portfolio changes if inflation spikes and interest rates rise quickly. Many of the investments I use are ideal for a low interest rate environment, and they even can withstand modest, steady increases in short-term rates by the Federal Reserve. If rates jump by a percentage point or more, however, I would drop the most interest rate–sensitive holdings (Cohen & Steers Limited Duration Preferred and Income…Reaves Utility Income, DoubleLine Emerging Markets)…and redistribute the money to the portfolio’s other funds or to US Treasuries.
The All-Dividend Portfolio allocations below are a reasonable starting point for retirees and those nearing retirement with a moderate tolerance for risk. Your own allocation will depend on the size of your nest egg…when and how much you will need to withdraw annually to meet your living expenses…and how much risk you feel comfortable taking.
• 30%: DoubleLine Total Return Bond. Recent yield: 3.4%. Five-year performance: 3.1%.* DoubleLine.com
• 25%: DoubleLine Emerging Markets. Recent yield: 4.9%. Five-year performance: 4%.
• 13%: Cohen & Steers REIT and Preferred Income. Recent distribution: 6.9%. Performance: 20.2%. CohenAndSteers.com
• 10%: Cohen & Steers Limited Duration Preferred and Income. Recent distribution: 7.5%. Five-year performance: 7.9%.
• 10%: Reaves Utility Income. Recent distribution: 5.7%. Performance: 19.1%. UtilityIncomeFund.com
• 7%: Cohen & Steers Infrastructure. Recent distribution: 7.2%. Performance: 16.9%.
• 5%: Verizon. Recent yield: 4.2%. Performance: 10%.
*All performance figures are 10-year annualized returns from Morningstar Inc. through June 30, unless otherwise noted.