Retirement Income Equity Selection Factor 1: Yield

Bruce Miller

By: Bruce Miller, CFP®

In my previous article, I provided some basic consideration for selecting dividend-income-generating equities and identified the five criteria that I consider most important. I will provide additional details and explanation for each of the criteria over the next few articles, starting with the dividend yield in this article.

To be a contender as a long-term reliable income source, a security must have a minimum yield that will provide the required household income. A stock or bond can have the most reliable income dividends in the history of humanity, but if it does not provide sufficient income, it will not work as an income security.

The best way to determine the required yield is to do a household income analysis, as we did earlier for Ariel and Lee. Their analysis shows that to use the pure income approach, they require an average portfolio yield of 4.8%. While this level of yield can be achieved, it will require higher-yielding securities such as low-income growth utilities, preferred stock, equity real estate investment trusts (REITs) and moderate risk master limited partnerships (MLPs) or higher-risk, dividend-paying C-Corporation stocks. First, I will discuss how to construct the income-generating portfolio using a mix of income securities. Afterwards, we will look at how to mix individual security yields to arrive at a target income portfolio yield. I do not want to jump too far ahead but generally each income class has a yield range that we can expect over the long term. Below is a list organized by those income classes and grouped by the expected reliable yield.

–  C-Corporations:  3 to 5%
–  Utilities:  3.5 to 6%
–  MLPs:  4 to 7%
–  Equity REITs:  3 to 6%
–  Preferred Stock/ Exchange Traded Debt:  6.5 to 8%
–  Individual Bonds:  3 to 4%
Exclusive  What Exactly is a Dividend?

Generally, we are looking for yields in the ranges listed above for the particular income class. The yields that fall below the range will not be sufficient for most income investors and yields that are above the preceding ranges generally carry too much income risk.

Please note that this grouping into classes is by yield range and this range certainly will shift up or down over economic cycles. I will discuss at a later stage another expected yield grouping – by income group – which is done for purposes of managing income risk.

Dividend Yield

How exactly do we calculate a yield? This is mostly commonly done by taking the most recent quarterly dividend and multiplying it by four – or multiplying it by 12, if the dividend is paid monthly and dividing by the current share price. Another method is the 12 month yield, calculated by adding together the most recent 4 quarterly dividends or most recent 12 months of dividends for monthly dividend payers, and dividing by the current price.

The preceding example assumes a stable quarterly or monthly dividend that is fixed (such as with preferred stock) or increases periodically. However, the periodic dividend payouts for some types of equities, such as bond mutual funds, Business Development Companies (BDCs) or Royalty Trusts vary from period to period. There are multiple methods to calculate the yield for these types of equities.

One approach is to take the annual dividend for each of the past few years and the total dividend paid to date for the current year. To calculate the annualized total dividend amount for the current year, do the following:

  • Divide the sum of all dividends received so far for the current year by 1 minus the fraction of the year’s dividends yet to be paid.
    • For example, assume a stock has paid five of its monthly dividends and these payments equal $0.75. To annualize, divide 0.75 by (1 – 7/12) = 0.75/0.4167 = $1.80 annualized.
  • Divide each year’s total dividend by the current share price and look at the yield’s trend.
    • If the trend of the total annual amounts of these uneven dividends is upward, then you can use this year’s annualized dividend yield as your projected yield.
    • If yields are declining, you should probably decline the annualized yield for this year.
  • For example, if the annual dividend of the potential equity has been declining by 2% per year and last year’s dividend was $1.00 per share, it would be reasonable to reduce the current year’s annualized dividend by 2% to $0.98 and divide this by the current share price to get its current yield.
Exclusive  President Trump’s Pro-Growth, ‘America First’ Speech is Bullish for Oil, Economy

This is just a brief overview of the dividend yield and two basic methods to calculate it. Yield information is easy to access since most websites that provide financial information will have the dividend yield included as one of the key metrics in the main section or the summary for a security. Some of the other criteria we will discuss are not as straight forward. In the next article, I will move to the next criteria on the list and discuss dividend history.


Bruce Miller

 

 

Bruce Miller is a certified financial planner (CFP) who also is the author of Retirement Investing for INCOME ONLY: How to invest for reliable income in Retirement ONLY from Dividends and IRA Quick Reference Guide.


Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
previous article

By: Bruce Miller, CFP® So far in this series of articles, we have discussed the important principles of pure income investing, its advantages, disadvantages and the mental discipline I consider vital to this approach for providing a reliable retirement income. Now that we have a general idea about ou

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE