A Simple $1 Million Passive Income Portfolio For Retirement

seekingalpha06-07

Warren Buffett once opined on how to live off of dividends in retirement.We discuss a simple way to follow his advice on this.We also share how to further enhance the yield on this portfolio while ...

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He said, If I were retired and I had a $1,000,000 portfolio of stocks paying me $30,000 a year in dividends, my children were grown, and the house was paid off, I wouldn't worry too much about having a lot of cash around. Given that the Schwab US Dividend Equity ETF (SCHD) currently yields 3.42% on a trailing 12-month basis and has a track record of growing its dividend at a greater than 10% CAGR over the past five years and 10 years, as well as a roughly 9% CAGR over the past three years, investors with a $1,000,000 portfolio could easily generate over $30,000 a year in dividends with the simple click of a mouse. They would also enjoy dividend growth that should easily beat inflation for the foreseeable future. This portfolio would be diversified across 103 individual holdings as well as broad sectors of the economy and diversified among high-quality blue chips such as Texas Instruments (TXN), Amgen (AMGN), Pfizer (PFE), Lockheed Martin (LMT), Coca-Cola (KO), PepsiCo (PEP), Verizon (VZ), Chevron (CVX), Cisco (CSCO), and BlackRock (BLK), which constitute the top 10 holdings and 41.65% of SCHD. Moreover, when you consider the fact that the average retiree today earns about $1,800 per month in Social Security, they should be able to enjoy close to $5,000 a month in retirement income between their SCHD dividends and their Social Security. This total payout should grow faster each year than inflation since social security gets an annual bump and SCHD has a long history of growing its dividend faster than inflation. As a result, someone retiring at ~65 should be able to live fairly comfortably if they were to build a $1,000,000 portfolio invested in SCHD, have their house fully paid off, have no other debt, and have no children or other dependents. Pursuing A Higher Yielding Portfolio That being said, for investors who want to retire in a more expensive area or live a more lavish lifestyle and would like to generate $60,000 a year in dividends off of their $1,000,000 portfolio and have it grow at least in line with inflation on top of social security payments, there are several great picks to make that a reality. Enterprise Products Partners (EPD) offers a very attractive 7.6% forward dividend distribution yield that should grow at an inflation-beating rate for the foreseeable future. Moreover, it is backed by a well-diversified, defensive portfolio of midstream infrastructure assets that are mostly contracted to lengthy terms. It is also backed by an A-minus credit rating with a balance sheet that has long terms to maturity, almost entirely fixed interest rates, significant liquidity, and a low 3.0 times leverage ratio. MPLX (MPLX) is another attractive opportunity in the midstream space and offers an even higher distribution yield of 8.4%. It has a solid balance sheet rated BBB, a relatively low leverage ratio, and is also growing the distribution at an inflation-beating rate. Energy Transfer (ET) is another midstream that has significantly strengthened its balance sheet recently and earned a credit rating upgrade to BBB. It has an 8.3% forward distribution yield and is guiding for 3% to 5% annualized distribution growth. For those who do not like dealing with the K-1, they can either diversify into midstream ETFs like the Alerian MLP ETF (AMLP) or the Global X MLP ETF (MLPA), as well as into 1099-issuing C corporations like Enbridge (ENB), TC Energy (TRP), and ONEOK (OKE), which all have attractive dividends and dividend growth rates that should enable you to generate mid to high single-digit dividend yields along with inflation-beating dividend growth for years to come. Moving outside of the midstream sector, there are also numerous attractive opportunities in the REIT sector, including triple net lease REIT blue chips like Realty Income (O) and W. P. Carey (WPC). They boast A-minus and B-plus credit ratings, respectively, and have broadly diversified portfolios of quality real estate signed to long-term triple net leases. Realty Income has a long track record of growing its dividend every year for decades, along with a 5.8% forward dividend yield. W. P. Carey recently cut its dividend, but it is on much stronger footing moving forward. It recently shed its office exposure and is increasingly becoming an industrial REIT with a 6.0% dividend yield. In the multifamily space, there are options like Mid-America Apartment Communities (MAA) and Camden Property Trust (CPT) that offer dividend yields of 4.3% and 4%, respectively. They also have solid dividend growth track records, very strong balance sheets, and well-diversified portfolios of multifamily real estate that make them fairly defensive in nature while also enjoying solid growth prospects over the long term. Finally, there are some solid dividend payers with impressive track records in the business development company sector, such as Main Street Capital (MAIN) and Ares Capital (ARCC). While neither of them is particularly cheap at the moment, we do think the dividends of both should be sustainable barring a catastrophic economic collapse. Main Street Capital yields 6.5% and is backed by an investment-grade balance sheet, while Ares Capital Corporation yields 9% and is also backed by an investment-grade balance sheet. These are impressive yield builders. For asset management, significant infrastructure, private equity, and renewable power exposure, along with additional commercial real estate exposure, Brookfield Asset Management (BAM) is an enticing option. It has a double-digit annual growth outlook ahead of it for both distributable earnings and dividends per share, along with a 4% forward dividend yield, making it one of the more exciting dividend growth stocks in the market today. Investor Takeaway Combining these names into a portfolio with, say, 50% SCHD and 50% of these other blue chips that are generally not present in SCHD's portfolio, investors can generate a dividend yield of around 5%. When combined with Social Security, this can earn them ~$6,000 in passive income per month which should also grow at a pace that exceeds inflation over time while still holding the security that comes from owning investment-grade blue-chip businesses in the entire portfolio.   Security % Weighting Yield   SCHD 50% 3.4%   EPD 4% 7.6%   MPLX 4% 8.4%   ET 4% 8.3%   ENB 3% 7.5%   TRP 3% 7.1%   OKE 3% 5.1%   O 4% 5.8%   WPC 4% 6.0%   MAA 4% 4.3%   CPT 4% 4.0%   MAIN 4% 6.5%   ARCC 4% 9.0%   BAM 5% 4.0%   Click to enlarge  Additionally, as Warren Buffett pointed out, with no personal debt and the house fully paid off, this should free someone to live off passive income for the long term. If they choose to be a little bit frugal, they can actually save some of that excess cash flow and reinvest it to further increase the dividend growth rate and potentially leave a substantial inheritance to heirs.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2441570280"}