Introduction
Managing an investment portfolio is a very personal matter. Consequently, the most important consideration is to design a portfolio that meets your own unique goals, objectives and risk tolerances. Everyone is different, and consequently, every investment portfolio can and should be appropriately different as well. Stated more straightforwardly, I do not believe in cookie-cutter or one-size-fits-all approaches to portfolio design.
In the same vein, I believe that investment portfolios, especially retirement investment portfolios, should be designed and constructed to meet the specific needs of the individual it is built for. In some cases the objective might be current income and safety. In other cases the objective might be the necessity to earn the highest possible rate of return. Importantly, the most appropriate objective for each individual will often be driven by factors that are external to the portfolio itself.
Two of the most important external factors are the size of the portfolio relative to the investor's needs, and/or the amount of time the investor has before entering the withdrawal phase. These important factors are the major contributors regarding whether the individual will be required to harvest principle upon retirement, or whether they will be able to live comfortably off of the income their portfolio can prudently generate.
Of course the optimum scenario belongs to the prudent planner and disciplined saver that started early and built up a portfolio over time that is capable of generating more than enough income to live off of during retirement. More simply put, the larger the size of your portfolio, the more options you have. For example, if you have amassed a portfolio that is large enough to generate more income than you need to live off of, you can position your portfolio as riskless as possible if you so choose.
On the other hand, if you have determined that you must grow your assets to meet your needs, then you will be required to take on more risk. Therefore, I believe that the best investment advice that any individual can receive is to start early and save regularly. Whether you are inclined to invest in equity (stocks, real estate, etc.) or debt (bonds, CDs, etc.) the sooner you start, and the more often you contribute, the more you will accumulate over time. I am a firm believer that no matter what type of investment you choose, “time in” is more relevant and better than “timing.”
Nevertheless, and with the above stated, this article is oriented to those investors that have had the good fortune to amass assets large enough to comfortably live off of in retirement. However, the specific size that a portfolio needs to be will also differ from one individual to the next. Some people desire or require lavish lifestyles, while others will be more modest with their needs. Regardless, the primary focus of this article will be on implementing portfolio design principles that apply best practices for achieving yield or income.
Principle Number 1: Be Realistic With Your Yield Objective
Establishing a realistic assessment of available current market yields should be the first step that every investor investing for income should take. From my perspective, this takes precedence over calculating the yield you require from your portfolio in order to meet your needs. Therefore, I believe the best place to start is by examining the yields available from Treasury bonds, widely considered the least risky investment of all. An intelligent baseline and perspective of the yield you can realistically achieve on your portfolio is best established by being fully cognizant of the yields that the lowest risk investments provide.
The following snapshot taken from Google finance shows the current yield on Treasury bonds at the time of this writing.
Current Treasury bond yields:
6-month 0.05%
2 year 0.64%
5 year 1.4%
10 year 2.08%
30 year 2.88%
After establishing the yields available from the lowest risk fixed income investments, it is then prudent to move on to and conduct a review of the lowest risk dividend paying equities. A review of the yields available on the Standard & Poor's Dividend Aristocrats or the Dividend Champions provided by fellow Seeking Alpha author David Fish are a sensible place to look.
However, there is an important consideration when examining the yields on dividend paying equities that is not required when examining fixed income yields. When examining the yields on blue-chip dividend paying stalwarts, it is important to evaluate current valuation. In other words, it's important to determine what dividend yields are available from blue chips that are fairly valued. Additionally, it's also important to evaluate available yields on blue chips with different growth potential characteristics.
