Investing during retirement kcchongnz

Whenever I am playing golf with my kakis, or having a lunch or dinner gathering with my schoolmates or university mates, inevitably, I will hear conversation about where and how one can get a higher interest rate from a fixed deposit from banks promising, say a higher rate at 4.2%.
However, this higher return normally comes at a shorter-term, say 3 to 6 months tenure, and often, depositors may have to purchase a unit trust fund from the bank. The costs involved in the later often defeat the purpose of chasing the higher interest rate, though very few realize it.
Surprisingly, few, very few, consider investing in the equity market for a higher return. Most had got their fingers burnt before speculating in the stock market, one time or other. This, I have written an article about it in the link below,
http://klse.i3investor.com/blogs/kcchongnz/104168.jsp
It is understandable that so many of senior people who have retired now are so scared of the stock market and prefer to avoid it all together. In the process, many have missed out on the opportunity of obtaining higher return from the stock market.

Retirement Cash Flows
Assuming one retires at the age of 60, with everything paid up and without any other commitment such as children’s education, mortgage payment, car hire purchase, personal loans etc., how much money does he needs? How much he can spend?
This depends on several factors, among them are,

1. How much wealth has he accumulated?
2. What is his life style?
3. How long is he expected to live?
4. What kind of medical care he is expecting?
5. What car is he going to drive?
6. Is he going to travel often, local or overseas? Where overseas?
7. How is his money kept or invested?
8. ETC.

Table 1 in the Appendix shows how much one can withdraw, in today’s Ringgit (Adjusted for inflation) at the beginning of each year with one million Ringgit now for different rate of return and number of years of withdrawal in retirement, assuming he leaves nothing behind after expiry.
If one retires at the age of 60 and has a retirement sum of RM1 million put as fixed deposit in the bank earning an interest of 4%, and plans to live another 20 years to the age of 80 years old, he would be able to withdraw RM50000 every year, in today’s Ringgit.
RM50,000 withdrawal in today’s ringgit may be enough, or even abundant for some people leading a simple lifestyle, who are completely debt free and with no other heavy obligations like children’s education, home mortgages etc. For others who would prefer to enjoy a more luxurious life, such as having a bigger house, a better car, or to travel to Europe, US, South American etc. for annual holidays, RM50,000 a year is not enough.
What the retiree can do is to invest in the equity market, earning say 8% return a year. With this, he would be able to have an expected amount RM70000 a year, or RM20000 more to spend in a year, which he can use to do travelling, even to overseas destinations.
How can the retiree achieve his goal of a higher return, more importantly, safely in the stock market?
My proposition is following the high dividend yield investment strategy. The benefit of dividends is that they can provide you with a steady and growing stream of income (after offsetting inflation) that can allow you to live off the income streams in your retirement.
Is this dividend investing strategy workable? What evidences are there?

Historical return of high dividend yield investment
Since 1871 the U.S. stock market has generated 9.1% annual total returns, 52% of which are due to dividends and dividend reinvestment, and the rest 48% from capital appreciation rise of earnings of companies and valuation expansion. There have been many academic researches providing documental evidence that the dividend investing can provide satisfactory return over a long-period of time, and at lower risk.
Back in Bursa, as on 23^rd September 2017, I managed to find 19-unit trust funds with dividend yield investing theme from the latest The Edge Magazine, investing in Bursa. The returns of the 19 dividend funds are shown in Table 2 in the Appendix.
The funds returned average compounded annual rate, CAR, of 10.2%, 2.4% and 5.9% for 1-year, 3-years, and 5-years investing horizon respectively. The return for the past one year was good at about 10%, with the highest at 18.9%, with only one loser at -1.0%. However, the return of 3-year period at 2.4% was not good as Bursa was close at its all-time high at about 1885 three years ago. The longer 5-year period at 5.9% is certainly higher than the rate of inflation as well as the fixed deposit rate, but it was nothing great, unless the investor was lucky to have invested in the top performing dividend funds. Even that, the CAR would not have been more than 10% for the longer 3 and 5-year periods.
Can we do better with this dividend investing strategy on our own?
Certainly. Not only with higher return, but substantially so. Moreover, it comes with lower risks.

Dividend Yield Investing Strategy: My personal experience
I have written several articles on the high dividend yield investing strategy. The most recent article in i3investor is in the link below, with a portfolio of 5 stocks selected since two years ago,
https://klse.i3investor.com/blogs/kcchongnz/128386.jsp
The following checks were carried out when using this strategy as safety measures,

1. Dividend yields at least the same as the bank fixed interest rate, currently average about 3.0%.
2. Dividend pay-out ratio should be less than a cut-off, say 65-85% so that there is money left and the business can still grow with the reinvestment for potential increase in future dividend.
3. A business model that doesn’t require massive amounts of capital outlays relative to its earnings power.
4. Reasonable expected growth rate in earnings at least matches the overall economy, say >4%, also for the potential growth in dividends in the future.
5. Strong balance sheet for sustainability of dividend payment.
6. High return of equity and capitals > 12% such that the dividend payment is not only sustainable, but grows from internally generated funds.
7. Good free cash flows from where dividend is paid from internally generated funds
8. Shareholder-friendly management dedicated to treating shareholders as owners

You can see it is a very safe investing strategy, with high dividend yields, low pay-out ratios, high free cash flows and cash in balance sheet, and high return on equity as shown in Table 3 in the Appendix. These checks were carried out, all for minimizing risks and ensure the sustainability of the regular and increasing dividend payment, and hence suitable for investing during retirement.
As at today on 23^rd September 2017, the portfolio of 5 high DY stocks returned an average of 78%, way out-performed the return of the broad market of 9.3%, or an excess return of 69%.
There was only one loser in ECSICT, and the loss of the sole loser is only at 3.9%. The other four stocks way out-performed the return of the broad market, with 192% and 137% for Padini and Scientex respectively, and high double digit return for the other two stocks.
Figure 1 below shows the steady and increasing return of the portfolio since inception until today.


On 15^th November 2016, a watch list of 17 diversified stocks using the same low-risk high dividend yield investing strategy was provided to my first stock pick service participants.
As on 31^st August 2017, the portfolio returned an average of 25.4%, three times the return of the broad market of 8.4% during the same period.
There was only one loser in Perstima, which lost only 2.9% after it announced a surprisingly poor set of results recently, after many quarters of increasing profit.

What did all these tell you?



Conclusions
When one retires, his source of income from work stops. Hence during retirement, he depends on the nest egg he builds over the years for survival. Without any more regular income, preservation of capital is often more important than chasing return for most people. Placing the retirement fund in fixed deposit or purchasing a bond ensure safe return for retirement needs and wants.
However, one must wary of the inflation gremlin which can erode the real value of our money, and hence may derail our retirement financial plan of not having enough money to last before he expires.
Investing in high dividend stocks, with some checks, may provide one with much better return. Besides, it can be a safe investing strategy too if some proper checks and process are carried out.
The success of this high dividend yield investing strategy has been proven in academic research, from the experience of some super investor, as well as from my own personal experience.
This post is specially written for retirees. However, the principle applies to everybody who wishes to build long-term wealth for a comfortable retirement, slowly, safely but surely.
Investment knowledge pays the best dividend.
Anyone who is new, or old (retirees) to investing and needs some help may contact me at,
ckc14invest@gmail.com
KC Chong

Table 1: Annual withdrawal for 1 million Ringgit principal for various years of retirement and return

Return/ Years in retirement	10	15	20	25	30	35	40
2%	91490	57989	41318	31377	24802	20149	16697
4%	100000	66667	50000	40000	33333	28571	25000
6%	108787	75918	60000	49801	43345	38776	35384
8%	117817	85681	69895	60643	54653	50521	47544
10%	127056	95884	80892	72346	66999	63456	61018

Note: All in today’s Ringgit

Table 2: Return of dividend unit trust funds in Bursa as on 31^st August 2017


Table 3: Portfolio of 5 high dividend yield stocks, safety checks and returns

http://klse.i3investor.com/blogs/kcchongnz/133173.jsp