Yield/Growth to Meet Goals

05 Jun 2016 12:00

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Late last year there were some small changes in my life that will move my target retirement age from 60 to 62. To get their I had to re-plan all of my long term saving goals and I finally finished the last piece by analyzing my potential expenses and potential income to the age of 82 or 20 years into my retirement.

The final calculations showed that for every dollar I invest I need a certain combination of dividend yield and dividend growth rate. The table below is a summary of the various combinations I need going forward.

Yield Min Growth Rate
2.00% 11.50%
2.50% 9.70%
3.00% 8.00%
3.50% 6.70%
4.00% 5.50%
4.50% 4.30%
5.00% 3.20%
5.50% 2.00%
6.00% 1.00%

The important lesson here is that I am not limiting myself to just yield or just growth. Occasionally you may hear or read a scenario where one investor states to another investor "I would never buy the stock at that price because it is too rich." The rub I have is that if the yield and growth rate meet your savings or income goals does it matter in the long run that you paid more or less than the next guy? In these scenarios you need to let the ego go and just ensure you are on the path to achieving your goals.

Getting back to achieving my goals, now that I have a set of yield/growth measures I will not just apply this to new buys but also what companies I will use a dividend reinvestment plan (DRIP) with. I already scanned my portfolio and surprisingly 5 new companies were changed to a DRIP. My personal take is I must not have been DRIP'g these companies because the stock price was high in relation to when I bought them. But, just because I bought a position 5-6 years ago at a much lower price does not mean it is a bad investment today.

A good example is Dr. Pepper/Snapple (DPS). I bought DPS at $42/share and today it is averaging $93/share. Since DPS has more than doubled I was not DRIP'g the dividend as I thought prices were lofty. But the current dividend yield is 2.3% and 3 year average dividend growth rate has been 10.86% so this meets my yield/growth needs and it signals that I should have been DRIP'g the dividend the entire time (doh!). I chalk this up as yet another mistake that has contributed to my education on investing.

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