At Henssler Financial, we have established our Henssler Model Portfolio, which is a mix of our recommended high quality, individual common stocks. Our Model generally yields between 1.5% and 2% in terms of dividends. Over the years, we have also created a couple of income portfolios, one that has a higher current yield with slower dividend growth, and one with a lower current yield and a higher dividend growth.
In the 1990s, investors primarily focused on capital appreciation and capital gains. Now what investors may not understand is that you can put together a portfolio that yields about 4.5%. Today, you cannot get that in a 30-year bond.
Of course investors are quick to say that taxes are going to increase in the future, and dividends will be taxed at ordinary income rates. However, if an investor were to invest in dividend paying stocks in an IRA, there would not be a tax issue. Even if you are taxed at the top rate next year, cutting your dividends in half, you could still earn more than you could in a 5-year CD. Additionally, your investment would still be beating inflation.
We feel some investors forget that several companies raised their dividends by 8% to 10% in 2010. For example, Caterpillar, Inc. (NYSE: CAT) recently raised its dividend by approximately 5%. Also, keep in mind, there are many companies that have increased their dividend rates for more than 40 consecutive years. Some examples include Johnson & Johnson (NYSE: JNJ) and The Coca-Cola Company (NYSE: KO).
We ran a projection using companies raising their dividend by 4.5%. If you made an initial investment of $10,000, you would be receiving $482 in income. Ten years from today, at a 4.5% dividend growth rate, you would receive $715, or a 7.15% return on your investment. This was calculated based on our conservative portfolio, not taking into account any capital appreciation or decline. Investors should realize income on that portfolio increased nearly 50%. If you were able to pick stocks that have increased their dividend growth rate by 8%, in 10 years, you should have almost doubled your income.
We find that the “world is coming to an end” mentality is still very prevalent in the market place with the market volatility of 2008 and 2009 still lingering in the minds of investors. It is not surprising that investors feel that this cycle could quickly return.
However, if you have a portfolio of stocks paying you a nice income stream, perhaps with some growth that is covered by a company’s cash flow several times over, it gives you the opportunity to wait out the current market cycle.
You cannot pick stocks on dividends alone. You still must seek financial quality. An income portfolio is also not a substitution for our Ten Year Rule in terms of covering your liquidity needs. If you want to get more conservative in your stock portfolio, you can achieve that by buying higher dividend paying stocks.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
