Generating sufficient retirement income from investments is one of the long-term goals for most investors. The correct investment strategy will provide a growing retirement income from dividends.
Potential Retirement income
At AXIAM, our long-term goal over a 17 to 23 year period is to convert a client’s current capital into an annual dividend. Investing R2 million now, will, in approximately 20 years, provide an annual dividend income of R2 million, without the need to sell any shares. Because dividends, from the companies we invest in, typically increase annually, retirement income will continue to grow over your lifetime. Also, the portfolio will provide an income for future generations or legacies.
How do crashes impact your retirement income?
Quality companies continue to raise dividends in a crash
When markets crash, dividends do not necessarily decline. High-quality companies do not cut their dividends because they generate lots of cash and have low debt-to-equity ratios. The quality companies below all raised their dividends at the height of the 2008/2009 financial crisis.
Annual Dividends Paid 2006-2017
Shareholders will see their income continue to grow regardless of share prices fluctuations.
Market crashes can accelerate investment strategy
Secondly, market crashes are an opportunity to accelerate the conversion of your current capital into an annual dividend.
The McDonald’s share price declined as the “dotcom” crash of 2001 took hold, but the fundamentals of the hamburger business remained intact. Share Portfolios containing dividend paying companies will continuously generate cash available to invest when opportunities, like a market crash, arise. As illustrated above, quality companies increased dividends regardless of a market crash.
McDonald’s Performance in a Crash
As the McDonald’s share price declines, the opportunity to buy more shares at lower prices (Principle 10 – Buy when prices are low) arises. Our past dividend income ensures we have the cash to keep buying. Consider the following:
Each year you invest $2000 in McDonald’s.
In 1999, the share price is $40,31 per share and you are able to buy 49 shares with your $2000, yielding an annual dividend payment of $9,80.
In 2000, the share price is $16,08 per share and you are able to buy 124 shares with your $2000, yielding an annual dividend payment of $29,76.
McDonald’s Share Price and Dividends in a Crash
$2000 in 2002 buys you MORE THAN DOUBLE the number shares you can buy in 1999, 124 shares vs 49 shares respectively.
$2000 in 2002 buys you almost TRIPLE the dividend pay-out (number of shares x dividend per share) in 1999, $29,85 vs $9,92.
When share prices recovered in 2003, we have 124 more shares than we bought in 2002 and the dividend is raised again, this time 66% from $0,24 per share to $0,40 per share! Also, the year-end share price jumps from roughly $16 to almost $24 per share.
The above example illustrates how dividends can not only form the foundation of retirement income but also provide cash to take advantage of opportunities along the wealth building journey!
At AXIAM we focus on a long-term investment strategy built on 11 Investment Principles gleaned from the world’s great investors like Warren Buffett, Howard Marks and Charlie Munger. Contact our fund managers or sign up for our newsletter if you would like to learn more about investing your capital to provide ongoing retirement income.