More advice for a retiring friend and nephew

One has to build a solid, dividend-paying portfolio if one is to have a good trusted flow of income in retirement. A stock to consider is Emera (EMA).

First, it is selling in bear market territory. It could go lower and it might but it is well off its recent highs with a drop of more than 20%. 

 

 

At a price of $46.93, EMA is yielding 6.12%. Impressive. Morningstar has Emera on its Canadian Income Pick List for good reason and recently put Emera on the Morningstar Canadian Core List as well.

All retirement portfolios should have some exposure to the utilities sector. Emera is an excellent utility. If one did not have any cash in utilities, EMA today presents an investment opportunity.

The utilities sector is considered a defensive play as people need electricity regardless of economic conditions. With stable earnings and consistent dividends, utilities are less sensitive to market fluctuations. During recessions, defensive sectors like utilities tend to outperform the broader market. But, this does not mean the sector will not lose money in a downturn. Utilities can, and do, take a dive like any other investment.

An investor might allocate 4% of their retirement portfolio to Emera, investing half of that amount today and, if the price retreats, investing the other half.

Another good utility is Fortis (FTS). Fortis is down today but nowhere near as much as Emera. Fortis is correcting. It is off its recent high by about 15%. Selling at $52.49, it is yielding 4.5% today. Again, buying 2% today and 2% later seems like a fair approach.

Utilities are known to increase their dividends regularly. The dividend growth rate (DGR) for Emera is 11.66% over the past three years and 9.38% over the past decade. According to Investopedia, the DGR is the annualized percentage rate of growth of a dividend over a set number of years.

Aiming to invest 10% of a retirement portfolio in utilities is not unreasonable. A portfolio of $400,000 would have $40,000 distributed among a number of Canadian utilities. For instance, if one invested in Canadian Utilities, Emera and Fortis, (2-4-4%), this would generate about $2175 annually.

In the interest of full discloser, I have 3.45% of my portfolio in Emera. I am looking to add another 200 shares if and when the stock price falls a bit more. I also own Fortis and I do not own Canadian Utilities at this time. I do own Altagas (ALA). A stock many include in the utilities sector.

Advice for a retiring friend and nephew

My job had a very poor pension plan. If I relied on my company pension in retirement, I couldn't pay my bills. But my wife and I live well. How? Dividend investing. Each year we earn as much or more from our stock portfolio than we do from my company pension plus our CPP and OAS payments combined. For this reason, I am a big booster of investing in stocks in retirement.

With any luck, one will be retired for a long time. So, don't be cheap with your time. Put some time aside for research. To get you started, here are a couple of Webinars I believe a retiree should watch. Log-on to WebBroker and click on Learn -- Webinars -- Past Events. Watch: Five Stock Dividend Portfolio and Defensive Dividend Income for Retirement.

(After posting the above, I found Five Stock Dividend Portfolio on YouTube.)

One caveat: five stocks is a bare minimum. It can be done but why? Why buy one Canadian bank when you could buy two or three? Adding diversity while maintaining quality is always a good move.

Last June I decided to test my retirement theories. I created an imaginary retirement portfolio with an initial value of $1 million dollars. It can been seen here: Retirement Portfolio.

Today, that portfolio is worth $999,619.09. In January, I withdrew the minimum amount as an inkind withdrawal. In accordance with RRIF rules, these stocks were transferred to a newly opened TFSA now worth $42,397.06.

To sum up, my imaginary $1 million retirement portfolio is now worth $1,042,016.15. Later today, after making my monthly $3,470 withdrawal, I will have withdrawn a total of $27,076.65 to cover living expenses in retirement. I think I can claim success for my approach at the moment.

A retiree could choose to buy an annuity rather than buy stock. They could, I wouldn't and didn't, but it is done. On the plus side, an annuity locks in annual payments. On the minus side, the locked in annual payments stays the same for the life of the annuity. A locked in payment loses a lot of buying power over the years. I have an annuity-based pension paying $6273.72 annually. To deliver the same buying power today as it did when opened in 2009. it would have to be paying $8790.

How do insurance companies raise the money to make annuity payments? The insurance companies invest in stocks, bonds and cash funds for one thing. I like to think I simply cut out the middleman. Unlike my annuity payment, my portfolio payment has grown with the passing years and thus far my imaginary portfolio is doing the same.

A good source for insights into Investing

TD WebBroker offers classes on investing. Before signing up for a class, you might benefit from having enough investment smarts to be able to ask knowledgeable questions. I have found a great source of investing info is Investopedia.

Recently, I bought a little B2 Gold Corp stock. I made my decision to buy based partially on stuff I had learned reading Investopedia. There are reasons why one stock is a buy and another is not. What are those reasons? Read Investopedia for the answer.

Click the following link: The 4 Basic Elements of Stock Value. After that, check out this one: 4 Ratios to Evaluate Dividend Stocks. Investopedia is amazingly complete. If you like video instruction, Investopedia has that as well.