Considering investment strategies for retirement can be complicated and fraught: You are tinkering with your own quality of life in your golden years. Here, we will get into the theory behind building a retirement portfolio around blue-chip dividend growth stocks. We call them safe picks, and you’ll see why in just a moment.

But first, we need to touch on the importance of safety when building a retirement portfolio.

Seeking Security and Safety in the Years Before Retirement

So many investors lack a clear retirement plan, say Penelope Wang, Elizabeth O’Brien and Kerri Anne Renzulli, financial experts writing for Time Money. And even when they have one, their partners don’t necessarily see eye-to-eye with them.

But planning now, in the years before you retire, will pay so many dividends later. “Eighty percent of reaching your goal is defining what your goal is and having a plan for speed bumps that could derail you,” Michael Brady at Generosity Wealth Management tells them.

One important thing to keep in mind as you set your retirement goals: Financial math changes during retirement because your income is less inclined to fluctuate, but your spending can. After all, as Kathleen Elkins at CNBC points out, most of us will have hit our peak earnings before we turn 50.

Because the expense side of your personal ledger is subject to risk, you will want to build as much security into the revenue side of that ledger as possible. Some of that security can come from lifestyle choices:

  • Dana Anspach at The Balance recommends taking a long look at your spending habits now, before you retire, to look for ways you can economize your lifestyle and make your retirement income go further.
  • Also, now is a good time to talk with your children about your ability to help them out financially, financial writer Jennifer Kelly says.

Next, you can turn an eye toward your investment portfolio. For your riskier investments — the ones most vulnerable to a bear market — it might be time to part ways and take your profits, Carla Fried at Time Money says.

From this new baseline, you can start rebuilding your investment portfolio around assets that will provide recurring income, and we recommend blue-chip dividend growth stocks for this strategy.

family enjoying romantic sunset on the beach

Why Blue-Chip Dividend Stocks?

Blue-chip stocks that pay regular dividends have two big benefits. First, they offer the kind of stability a retirement portfolio must have, especially during bear markets. “During an economic downturn, investors may turn to these safe havens because of their secure nature,” Investopedia says.

“Blue-chip companies offer security during periods of slowed growth due to their intelligent management teams and ability to generate stable profits. If the stock market is experiencing a bear market, investors don’t need to worry about their investments in blue-chips because, generally, they recover.”

Remember, the goal is to shore up the revenues side of the ledger.

The other important aspect of these stocks to consider is how much money they pay out in dividends. Depending on your situation, you can supplement your income with dividend payouts or ride the compounding rates of return they provide.

When built and managed correctly, dividend growth stocks can help ensure a secure retirement. The proper portfolio results can look like this:

If you’re counting on dividend payouts as income, be warned that you’ll need a significant nest egg. As Daniel Myers at Investopedia points out, a $1 million portfolio at 5% would theoretically create a $50,000 income stream each year, right? Not quite. That napkin math doesn’t account for inflation or taxes. At Year 12 in Myers’ example, that $50,000 annual payout is worth just $25,000 in today’s money.

Therefore, these investments need not only to protect you against the downside but show healthy rates of return. That’s why we love blue-chip stocks. Over time, they tend to outperform the S&P as a whole. Joshua Kennon at The Balance says blue chips have historically shown a rate of return between 8% and 12% “decade after decade.”

The Trick to Picking Safe Dividend Growth Stocks

Broadly speaking, there are two kinds of investment strategies: Cash flow investing and capital gains investing. Michael Gardon at The Simple Dollar has an excellent guide to understanding the difference.

If you’re building a retirement portfolio designed to generate income, you’re practicing cash flow investing. This, as Gardon says, allows you to focus on generating income at certain intervals and not have to worry too much about risk or short-term market swings. Instead, you will be assessing a company’s ability to maintain cash reserves. “It is from cash reserves that companies pay dividends,” he writes. “If, for instance, you want to invest in Microsoft, you want to be sure that the company can generate and maintain a huge cash reserve.”

How do you identify the kinds of safe stocks that pay a growing dividend? We will have time to get more in-depth in Phoenix, but if you would like a good starting point for your own research, have a look at The Dividend Monk’s strategy. You’ll want to look for companies that:

  • Have shown solid, consistent growth over several years
  • Have more equity than debt
  • Can cover their interest expenses several times over with operating income

That’s why stocks with hyperbolic growth curves aren’t great retirement portfolio investments. As Sam Dogen at Financial Samurai points out, a fast-growing company like Tesla Motors will reinvest its profits into research and development before it will pay out dividends.

But just taking long positions on Fortune 50 companies won’t get you there, either. Take General Electric (GE), for example. In late 2017, Louis Navellier at InvestorPlace called GE a blue-chip stock “that could wreck your retirement.”

“General Electric Company (NYSE:GE) is the bluest of the blue-chip stocks,” Navellier writes. “It’s the only original Dow Jones Industrial Average stock that remains in the index. It has been around for over 150 years, a direct descendant of Thomas Edison’s vision for electrifying America.

“But GE is no longer that company with bright, shining future. It’s mired in decades of expanding into markets and then trying to figure out how they mesh with other corporate gears.”

VectorVest’s information gives GE a Sell rating, as well. One big reason for this is GE’s sales growth has been negative over the last 12 months, which we rate as very poor. Further, our information suggests the rate of growth for GE’s dividends is shrinking, at -11%. For comparison, the average stock in our database shows a growth rate of 1.28%, so GE is definitely underperforming against the market here.

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