Market Up or Down: Your Income Should Not Change

Your Income Should Not Depend on Market Whims

If the market dropped 10% during your first year of retirement, how would that affect your income? What effect would a 5-year bear market have on your plans? These are the questions we encounter time after time. Investors want to understand how to protect their retirement from the ever volatile swings of a volatile market, and for good reason.

But what if your retirement income wasn’t based on whether the market was up, down, or sideways? And better still, what if that income continued to grow over time at a rate that exceeded inflation?

When it comes to stocks we know a few things:*

  1. We know that, on average, stocks fall by 5% roughly three times per year.
  2. We know that, on average, stocks fall by 10% roughly once per year.
  3. We know that, on average, stocks fall by 20% roughly once every 3-5 years.
  4. But we also know that stocks have been a better asset class for earning long-term returns above inflation.

So the question is, how can we participate in the stock market but insulate ourselves from the wild swings that characterize it?

The answer is in an investment strategy that’s been around since the start of the market. One that accounts for nearly 60% of the total market return for the last 90 years, but usually flies under the radar of the typical investor: dividends.*

When a company has a positive outlook and wishes to reward investors it can offer a cash payment called a dividend. For example a company might pay a 2.5% dividend, meaning it pays its investors 2.5% back, in cash, on a regular basis as a thank you for investing in their company.

As a result, the stock price can go up, down, or sideways… but the investor will continue to receive his or her 2.5% payment. Now keep in mind dividend paying stock payments aren’t always a sure thing. The amount of a dividend payment can vary over time and companies may reduce their dividend at any time. This is why it’s important to pick companies with a track record of success and a history of keeping their dividend, even in difficult periods. Ultimately this means your income is not dependent on selling off the stock you’ve purchased, hoping that it has gone up. Instead, your income is based on dividend payments.

This is an important principle to understand, so I want to use an example to illustrate my point.

Every year farmers grow crops on their land to harvest and sell. Some years are better than others, but for the most part their yield is consistent and predictable. Now let’s say our farmer has had a terrible year: rain never showed up, his wife got sick, and the bills are piling up. In a pinch, the farmer decides to sell some of his land to cover the additional costs. That works, but when the next season rolls around the farmer has less land to grow his crops. He hopes that the farm will produce more crops to cover the shortfall, but all he can do is cross his fingers and hope for the best.

In this example, our farmer is essentially following the traditional approach to retirement income: selling off plots of his land (aka his portfolio) and hoping that the remaining land will produce enough to cover the difference. But the problem is two-fold:

  1. Eventually the farmer will run out of land to sell
  2. Bad years may leave the farmer with dismal crops to sell, forcing him to sell even more land.

In the end, it becomes a downward spiral for the farmer.

But what if the farmer were able to live solely on his crops every year without selling any of his land? And what if that income was more than the farmer needed, allowing him to purchase additional plots of land to grow even more crops on? The spiral would instead be an upwards one, allowing our farmer to enjoy an ever-increasing income while building a lasting asset to pass on to his children.

This is what a growth of dividend strategy seeks to do.

You see, dividends are always positive. When a company pays a dividend there is no risk that they’re going to ask for it back. It’s hard cash, in your account, to do with as you please. And better yet, some companies choose to raise their dividends on a regular basis. These are the types of companies we look for in our strategy.

We like “every” companies: companies that provide a service to

  • Everyone
  • Everywhere
  • Everyday

For example these companies include a soda maker, a ketchup maker, a tear-free baby shampoo maker, and even an iPhone maker (legal says we can’t name names.) The kind of companies investors find “boring” but flock to when the market ups and downs get to be intolerable. These companies may not be rockets to the moon, but they have a history of paying a consistent dividend and growing that dividend over time.

Your income should not depend on whether the market is up, down, or sideways. It’s too important to leave to the whims of a rollercoaster market. At the same time, hiding cash in your mattress is unlikely to give you the growth you need to sustain your lifestyle 30 years into the future (plus it’s lumpy). The goal of our growth of income strategy is to help ensure your income stays predictable while growing with you in the future.

But this is only one way dividends can help you pursue your retirement income goals. They can also help you avoid the problem of outliving your money, conquer the leaky boat that is inflation, and even help you leave a legacy for your family or causes that are important to you. Want to learn more? Enter your email below and we’ll send you a recording of our webinar on the 5 Ways to Keep Your Income Growing with a Dividend Growth Strategy, hosted by the founder of Prosperion Financial Advisors, Steve Booren.

Steve Booren

Steve Booren

Steve started his investment career in 1978 with the NYSE investment firm EF Hutton, working in the environment of a large investment company. Desiring to provide clients with objective investment advice, he founded Prosperion Financial Advisors. Learn more about Steve here.

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*According to Yahoo Finance
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures a profit or protects against loss.
Investing involves risk, including the risk of loss.