I have been around the financial advice industry long enough to understand all “financial advisors” are not cut from the same cloth. There are financial advisors that work for large insurance companies and there are others, like myself, who are independent and offer a wide array of services, not just insurance products. Now before my brothers and sisters in the insurance industry blast me, understand I have read almost every page of every book written by insurance product industry as well as countless studies by The American College and PhD’s you would all recognize, so I am not ignorant and uninformed about this topic.
The recent market volatility brings the annuity salespeople out in force, and I know many hard-working people in the industry, and I have a tremendous amount of respect for them. In fact, I was one of them for a short time when I came into the industry. But, they use these kinds of volatile times to say, “see, don’t you wish you had an annuity?”
When you come into the industry you are taught how to sell, not how to plan. They teach you techniques to work on your client’s emotions. People like security, and volatility is the enemy to those emotions. Emotions can prompt us to make uninformed decisions based only on the fear of loss.
I’ve watched this unfold as many of you have due to the recent volatility due to the COVID-19 pandemic. It is hard to watch an account dwindle by over 30% (based on the S&P 500) in about a month, if that is what happened to you. Some variable annuities have very high expenses, the investments inside them have separate fees, and they are very complicated products for the average person to understand. Heck, most advisors that sell them don’t understand them completely.
It is my belief there needs to be a plan first, and then the implementation stage can begin. For instance, If there is a gap in life insurance to protect your loved ones, life insurance is purchased to fill that need.
But when you are investing for retirement and you need to live off that income it is important to make investments that fit your plan for what you want your retirement to look like. For instance, what lifestyle you want to live and make plans to achieve that. As a financial planner I take a look at all possible income sources and determine whether those income sources will be enough to cover those lifestyle expenses and if not, I put a plan in place to get my clients to that goal. Sometimes, that means breaking the news to them, that they need to work a couple of extra years to get there or save more between now and then, but my approach is never to sell a product to them without first understanding all of their financial circumstances as well as any other family circumstances that may be present. I have heard many “advisors” say, “I already know I am going to pitch an annuity before I even meet the client.”
Why is a strategy so important?
When you sit down with a financial planner, who also manages assets, they will look at the total picture. Annuities have been around for a long time, in fact if you think about it, Social Security is an annuity. You paid into it, and you get an income you can’t outlive. When social security and other lifetime income streams just don’t cut it, then you must have an investment strategy that fills in the gap.
Annuities are only guaranteed by the issuing company, I’d rather own any (or all) of the dividend aristocrats than an annuity from an AM Best B rated company for SAFETY. The dividend aristocrats are companies that have increased their dividend for 25 or more consecutive years. Getting a raise every year beats a fixed payment any day.
Annuity marketing sells the “payout” rate on immediate annuities, as in “You’ll get an 8% return on investment.” But they don’t tell you 7% of that is return of your own money. Let us calculate the real rate of return before you buy.
The longer you live the more inflation eats into your fixed income sources. In twenty years, you will often see your buying power go down significantly. That is why you need a rising income in retirement and that is where an investment strategy built on financial disciple and a strong investment policy is a must.
Dividend growth investing is a great strategy to provide this rising income in retirement. I am talking about high quality investor friendly companies with a seriously long track record of dividend payments. Please see the chart 1 below to see the growth of dividends of the S&P 500 from 1976 to 2018. I believe this strategy coupled with guaranteed life income sources is the superior retirement planning strategy.
As you can see from the above chart, compared to bonds, a dividend growth investment strategy gives you a rising income over your long-term retirement. In fact, common convention tells investors to be in bonds during retirement because they are “safer” than equities.
When investing in stocks for income it’s important to have an accumulation strategy.
Take for example Cisco (Ticker: CSCO). Cisco is an internet protocol and network infrastructure company. They have a tremendous amount of cash and a competitive advantage. In July 2019 they were trading around $57 per share. I look at this stock as a great value now that it is currently trading at $36.50 per share. With a current dividend yield of 4.16% and enough cash to pay and or raise their dividend, even during a recession, I rate this high on my list to buy.
As an individual investor, I suggest you look for opportunities like this in the market, or let us do it for you. For the last couple of years, finding stocks trading at or below their estimated fair value has been hard. Look at the below chart as it shows a visual on the yield on cost.
The chart above is NOBL, an exchange traded fund that holds Dividend Aristocrats. Since its inception you can see how it has performed. All the companies in this fund pay dividends and have a long track record of doing so. Our investment strategy is that of investing in these kinds of companies so you can see your income in retirement go up, not get nibbled away at over your long retirement by inflation.
Just like buying an apartment building to generate income through rent, these companies generate predictable, consistent income even during tough economic times. If you owned an apartment and the real estate market tanked, you wouldn’t panic and sell your apartment building would you? Of course not, as long as you had tenants paying rent every month, you would still get paid. The same happens when you own high quality dividend paying stocks.
Bill DeShurko, President and Portfolio Manager
James Kilgore, CFP(R)
Ofc: 937.434.1790 Bill@401Advisor.com or Jim@401Advisor.com
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Investing involves risk. *Past performance is not a guarantee of future results.
