Two Rules for Allocating Your Income Investments

I remember the first time my wife asked about our retirement program. Aside from the shock of realizing I was fast approaching 45 and needed to be seriously thinking of that day 20 years away, my first response was to tell her what I am telling you. One of the best ways to fund a retirement is by using high-yielding stock dividends. Fifteen years in the stock business (up to that time, anyway) had taught me how important cash flow from stock investments can be.

[Editor's Note: 5 highest yielding, safest investments for 2007]

So to help you get a start on planning for your retirement or to help you repair your retirement portfolio, here are the two rules I have used over the years to structure my portfolio.

Before I continue, one word of advice. Retirement planning can never begin too soon. Now is the time, not next year or next decade. In today's world where pension plans are getting leaner and fewer by the week, you definitely need to learn all you can about how to establish a plan and how to find the tools that will help you work your plan.

This week, I will give you a few ideas to start you off and over the next several weeks I will add to the list of techniques and sources that can help you get the job done. But, your most important job will be to take seriously what planning for retirement means in light of your own unique situation. You must identify your needs, write them down, and then identify how you can meet and implement your plan, day-by-day, year-by-year.

As I said, this week we will be solely about the element of stock dividends as a part of your retirement plan and here are those two vital rules I mentioned to help get you started.

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Rule 1: Use these guidelines to allocate your dividend-paying stocks. The idea here is to lower portfolio risk over time and as you approach your retirement date.

(a) Under 40 years old: Stocks bought for dividend income specifically should be 30 percent or less of your stock portfolio. This is the time for growth stocks to build up your principal.

(b) Between 40-55: Dividend income investing grows to 45 percent to 55 percent of the stock portfolio. Time to begin employing the growth dollars made earlier to begin a good income stream.

(c) From 55-65 (or retirement time): The 75 percent level for dividend income stocks is an absolute minimum. Risk taking should be clearly declining, with no more that 15 percent — 25 percent of your stock portfolio used for growth or higher risk stocks.

(d) After retirement: Keep the risk stock level at never more than 10% of your stock portfolio. Risk is a bad word at this level! This set of guidelines will save you many sleepless nights. Believe me, I speak from experience.

[Editor's Note: Protect your wealth from the baby boom crisis before it`s too late.]

Rule 2: Gauge the level of risk you can assume in your retirement plan. This guideline is strictly an age-oriented one. The idea here is to move to more mature public companies as you get closer to retirement.

(a) Under 40 years old: Invest in stocks that are newer to the universe of public companies. Companies that, for example, went public in the last 15 years and are paying reasonable dividends. Reasonable can be defined as 1½ percent to 2 percent higher than the prime rate.

(b) Between 40-55: Begin to shift the dividend search to longer established companies, usually ones that have at least a 15-20 year history of maintaining good dividends and have shown reasonable growth over that same period. Reasonable can be defined as at least 8 percent to 10 percent greater growth than the U.S. GDP.

(c) From 55-65 (or retirement time): Start shifting your portfolio to companies that have been public at least 40 years and represent the more conservative areas of our economy — utilities and companies offering well established preferred stock dividends are good examples.

(d) After retirement: Pare the list of companies you invest in for dividend income to just those that have a consistent record (usually 30 years or more) of paying out at least 7 percent to 10 percent of earnings as dividends, paying at least a dividend that is 2 percent to 3 percent above the prime rate and companies whose stock price have closely matched the growth of the U.S. GDP. Stability now becomes the name of the game!

Don't forget to watch for more tips on how to use stock dividends for retirement income in our future weekly installments. Good hunting!

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