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There are umpteen books, articles, and services to help you build your nest egg. There aren’t nearly as many resources for creating a paycheck out of your portfolio, however. This is often a cause of doubt and concern among investors approaching retirement.

This is the intro to a series on how to turn your portfolio into a safe money machine in retirement.

You will learn

  • To what extent should an investor take tax aspects into account in their investment strategy?
  • Here’s how to set a budget for your retirement.
  • How much cash should you keep in your account when you retire?
  • Two ways a dividend investor can build their cash cushion and which is Mike’s favorite.
  • How does life translate from dividend payments to a monthly budget alone?

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The “dividend option” is the most classic way of generating income from your portfolio. It makes so much sense to do a simple calculation and then believe that you are done. Need $ 30,000? Easy! Imagine you’ve invested $ 800,000, you divide $ 30,000 by $ 800,000, and you make sure that your portfolio has an average dividend yield of 3.75%.

If your calculation results in a portfolio return of 3% to 4%, then you needn’t worry too much. In fact, you can potentially reduce your cash buffer to 1 year of your retirement budget and you’ll be fine. Unfortunately, many retirees will face a situation where they will need $ 50,000 per year while investing $ 600.00. Then it is not so easy to get a yield of 8.3%. Sure, you could tell me that you’ve found some generous MLPs or split-share products that are delivering an 8% + return. However, when you look at long-term returns, you may want to revise your strategy. Here is a quick example for the Canoe Income Fund (EIT.UN.TO) and the Financial 15 Split Corp (FTN.TO):

The first fall (canoe) is the “most successful”. Your dividend income is being eaten up by inflation year after year as your asset (the stock price) slowly but surely depreciates in value. If you were unlucky and bought the Financial Split 15, you have suffered both a loss of revenue (dividend cut in 2020) and a loss of capital (stock price was above $ 20 and is now struggling to stay above $ 11). This is not what I call a secure money printing machine.

It is important to note that Quadravest will describe Financial Split 15 as “a high quality portfolio of 15 financial services companies from Canadian and US issuers”. You could have saved yourself a lot of time and heartache by buying your three favorite Canadian banks and calling them for a day.

I understand that the 8% yield is easier to calculate and looks more stable. After all, when the company pays 8% every year, you don’t have to do a lot of calculations. You collect your dividends and move on. However, how many of those 8% returns ultimately cut your dividend and you wake to a massive loss of capital too?

The answer? Enough of it to kill your age portfolio.

We’ll cover this topic in more detail in the next installment. As an exception we will do three small episodes in the same week from May 17th to 19th. If you want to be notified, subscribe to our podcast through your favorite platform.

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