INTEREST PAYS DIVIDENDS
Raise your hand if this applies to you: “I need my portfolio to kick off some reliable amount of cash flow to partially or wholly fund living expenses in my retirement—whenever that is.”
You’re not alone. With firms veering away from pensions, many investors have saving for retirement as a major goal. (Another way to say it: For many, Social Security won’t be enough, and those who plan on relying on it alone will likely be in a world of hurt.)
Now, raise your hand if you think, once you retire, you need a portfolio full of dividend-paying stocks and interest-bearing bonds to provide that income.
You’re also not alone—it’s a very common view. But this is one dangerous, poverty-inducing bit of easily debunked bunk.
Or maybe not—maybe you have a $10 million portfolio and require only $50,000 a year. And maybe you don’t care if the $50,000 isn’t inflation-adjusted. Or, if you don’t have $10 million, maybe it doesn’t matter to you if your assets dwindle because of reinvestment risk or your high-dividend stocks suddenly stop paying dividends.
But chances are, if you’re reading this book, you don’t want your assets to stagnate or deplete—which is what can happen if you focus solely on coupons, interest, and dividends. What happens when the bond you bought in 2000 that yielded about 6.7 percent per year matures, and a comparable replacement bond in 2010 likely yields about 3.5 percent?1
And what happens if that stock paying an 8 percent dividend cuts it ...