Dear DTA,
I will be 60 at year end. I have a decent next egg, but 30% is in some biotech and more aggressive areas. The rest is is annuities and real estate that is paid off. I would like to get out of the aggressive things and have some guaranteed things.
-John L.
Thanks for writing in, John.
It sounds like you’re in a pretty good spot there. You may or may not know this, but a significant percentage of Americans your age have very little retirement savings, or no savings at all. So I think you deserve a round of applause for your efforts and foresight.
[ad#Google Adsense 336×280-IA]That said, your goal of moving toward a more conservative asset allocation is smart, in my view, as one’s ability to overcome huge losses dwindles as they age and stop/reduce working.
So it looks like you’re just looking to reallocate the 30% that’s aggressively invested.
However, becoming more conservative is not the same as “guarantees”.
It’s hard to find guarantees when it comes to money, so just be aware of that.
Annuities definitely skew on the conservative side of asset allocation, although that comes at the expense of fees and, potentially, lower long-term return on your investment.
After all, the insurance company backing your annuity is aiming to make a profit off of you.
And they’re usually pretty good at it. So that’s just something to keep in mind.
The other 30% could thus be invested in a way that’s perhaps not as conservative, allowing for a bit more long-term upside. You don’t know how long you’ll live, so you should aim to always err on the side of caution when you start to perform your long-term wealth and income planning.
As such, if I were you, I’d be thinking about building wealth and generating enough passive income to pay for the things you want and need in life.
The investment strategy I personally use, which is a strategy that could work perfectly well for that 30% of your asset base, is dividend growth investing.
I personally used this strategy to go frombelow broke in my late 20s to worth hundreds of thousands of dollars in my early 30s, and much of the end result of that is manifested via my real-life, real-money dividend growth stock portfolio.
This portfolio spits out five-figure dividend income on my behalf. Averaged out, we’re talking almost $1,000 per month in totally passive income. Better yet, the “growth” in dividend growth means this income is growing organically.
That’s right: I invest in high-quality businesses that routinely grow their profit year in and year out, thus allowing them the ability to also increase their dividends to shareholders (dividends are essentially a “cut” of profit).
You can find more than 800 examples of high-quality dividend growth stocks that pay out growing dividends to shareholders by checking out David Fish’s Dividend Champions, Contenders, and Challengers list – a compilation of every US-listed stock that has paid out increasing dividends for at least the last five consecutive years.
Of course, like any investment, you want to get a good value when you’re going out and buying stock, which is why I highlight an undervalued dividend growth stock every Sunday.
But dividend growth investing is fantastic for two primary reasons.
First, research has shown that dividend payers and growers tend to outperform the broader market over longer periods of time. This means growing wealth.
Second, the growing dividend income is in and of itself a great source of completely passive income. And since many high-quality dividend growth stocks feature dividend growth rates greater than inflation, one’s purchasing power is actually increasing over time. This means growing passive income.
You also indicate that you’re looking to get out of aggressive investments, like biotech. I’m assuming the volatility is something that bothers you.
Well, many of the prototypical dividend growth stocks out there sport low beta, meaning they’re less volatile than the broader market (and certainly less volatile than many biotech stocks).
And you don’t even have to move too far away from healthcare (if you don’t want to): high-quality dividend growth stocks like Johnson & Johnson (JNJ) and Welltower Inc. (HCN) give you exposure to healthcare, but they also give you those growing dividends. Best of all, the income these two stocks provide greatly exceeds that of the broader market. And they both have relatively low beta (meaning they’re not as volatile as the broader market).
These two stocks averaged out (just as an example) would provide you a yield of 3.70% right now. That’s very solid income. Of course, you’d want to diversify beyond just two stocks. I’m just providing you some possibilities.
While these dividends aren’t guaranteed, I can tell you that Johnson & Johnson, for example, has paid an increasing dividend to shareholders for 55 consecutive years. Not guaranteed, sure. But it’s pretty likely JNJ shareholders will continue collecting growing dividend payments for years to come.
So you truly can have your cake and eat it, too.
You can have growing wealth and growing passive income. You can actually exceed that of what the broader market can give you on both accounts, while also reducing your volatility. If that’s not a win-win, I’m not sure what is.
So be sure to check out the undervalued dividend growth stock each week. I’m confident you’ll find some ideas that are less volatile than some of your biotech stuff, John, while providing a very appealing combination of growing wealth and income over the long run.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.