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Top Retirement Stock Searches This Month
There’s No Such Thing As Passive Income
A perfectly sensible idea. But beware of a common misconception…
Owning an income property is not a source of passive income. Almost certainly, you’ll have to work for it. Even if you hire a property manager and an accountant, you’ll do some light and, most likely, heavy lifting.
Articles litter the internet about earning passive income, be it via income property, writing, creating social media content, becoming a YouTube star, or some other purportedly low-effort side hustle. Keyword there is “earning.” Because even if you do technically make some money in your sleep, chances are you’re working for it – to some degree – while you’re awake.
And there’s nothing wrong with this. In fact, as we discussed last week, if you work longer, you might stave off cognitive decline.
As we continue to cover ways to prepare for and fund retirement, today we consider an investing style that people often erroneously place under the passive-income umbrella.
5 Stocks to Buy Now for Retirement
We’ll go deeper on dividend yield next month in our series on dividend and ETF investing. So look out for that.
For today, just know that dividend yield is a ratio showing how much a company pays in dividends each year relative to its stock price. You calculate it by dividing a company’s annual dividend per share by its stock price. We’ll give a real example in a second.
Some people like to say you can live off of yield (or dividend income) in retirement. Sometimes, they go so far as to say this is a source of passive income.
Both are faulty contentions.
First, passive income. We already discussed this. It takes work to construct and mind a portfolio. If you’re trying to live off investment income, it takes even more work. Of course, you could hire somebody to do the work for you (which, of course, takes money), but we’re assuming you’re a DIY investor OR an investor who has a money manager and still keeps serious tabs on your portfolio.
Bottom line: It’s all work.
Second, living off of yield. We love the top five “retirement stocks” in our proprietary sentiment indicator, Trackstar. If you’re buying five companies to open a retirement portfolio today, you can’t go wrong with Apple (AAPL), Microsoft (MSFT), Allstate (ALL), Disney (DIS), and Exxon Mobil (XOM).
Even with these household names, there are caveats. Two in particular. Yield is the easiest one to illustrate and anticipate.
Consider Microsoft. As we write this, the stock pays $2.72 in annual dividends and yields 1.12% at a stock price of $242.74.
So, setting reinvestment of dividends aside, if you own 100 shares of MSFT, you can expect to collect about $272 in annual dividend income. If you own 100 shares of Microsoft, their value, at $242.74 per share, is $24,274. So the 1.12% yield produces $272 in income from a position size of $24,274.
You can see where we’re going with this.
Let’s say you require $4,000 a month to live in retirement. This means you need $48,000 a year.
If you were retired today and relied on that income this way, the above numbers mean you’d need to own more than $4.3 million worth of MSFT to yield $48,300 of income.
You can calculate this across a portfolio. If your portfolio yields 1.12%, you still need a roughly $4.3 million portfolio to generate $48,300 annually.
That’s a tall order. So, for most mere mortals, dividend income is only part of the equation. You’ll likely require other sources of cash – your investment principal, Social Security, cash savings, a pension, employment – to help fund retirement. Don’t believe anybody who tells you it’s easy or even hard to live off dividend yield. Unless you’re crushing it, it’s nearly impossible.
Then, there’s the other important caveat. There are no guarantees, even among the most well-known, seemingly blue-chip stocks.
We included Disney here to make a point and because we think the company will return to its glory days. It’s down about 33% over the last year and 7% over the last five, so you’re taking a risk buying it. But you’re also potentially buying a company set to roar back sooner rather than later. We think spinning off ABC/ESPN is the right strategic start.
But that’s not even the caveat. The caveat is, after paying a dividend for 40 straight years, Disney stopped doing so in 2020.
This speaks to the risk inherent in what appear to be the safest stocks and the work you might need to do when bad stuff happens with otherwise good companies. If you were relying on Disney’s dividend in retirement, you would have had to put down the poolside piña colada and figure shit out.
The Bottom Line: Investing – even for something as potentially stressful as retirement – is fun. But it’s not easy. It requires work. And, as Disney proves, the unexpected can happen and throw even the most solid plan for a loop.
This is one reason we’re here. To help guide you through the personal-finance and investing waters. We do some work to help you do the rest of the work necessary for and suited to your situation.
Over the next few weeks, expect more on retirement, dividends, ETFs, and other key investing tools as well as ways to best manage your personal finances in this uncertain economy.
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