Prepare for Retirement Early: Set a Margin of Safety for Your Total Return

I just published another Seeking Alpha article on investing with a focus on total return for retirement. It covers another perspective, rather than focusing on the income, though that is important as well. Here is an excerpt of the article outlining the main concept:

Total Return = Dividends Received + Capital Appreciation

Then, total return with a margin of safety will be something like this:

Total Return With Margin of Safety
= Safe Portfolio Dividend
+ Buy at Fair Valuation or Undervaluation
+ Add a Buffer to Expected Total Return

Setting a Margin of Safety for Your Total Return

If I’m planning to achieve 8%-plus annualized returns, I would aim for, say, 10% for my portfolio’s total return estimation. The portfolio will consist of a range of companies that have mixed estimated total returns. The estimated return of the portfolio will sit at an average of 10% to add a margin of safety for my planned 8% return. This total return is achieved by:

  • Having a mix of dividend companies, from ones with low yield and high dividend growth, to moderate yield and moderate dividend growth, to high yield and lower dividend growth.
  • Setting a maximum number of holdings I’m intending for capital gains of double digits.
  • Building an increasing income stream with intention of reaching 8%-plus yield on cost by year N. Number of years required is determined by the portfolio’s starting yield, and the growth of yield. The companies to grow the portfolio income stream must be high quality and have consistent earnings. Companies I have in mind are Colgate-Palmolive (CL), Coca-Cola (KO), Kimberly-Clark (KMB), Johnson & Johnson (JNJ), Procter & Gamble (PG), Chevron (CVX), and Exxon Mobil (XOM).

Closing Comments

When you still have many years ahead of you until retirement, consider a focus on total return instead of purely focusing on income. For example, considering a company with low yield but high dividend growth due to high earnings growth will actually appreciate the price of the security accordingly. Also, consider setting a margin of safety for the estimated return of each of your investments.

At the end of the day, you’re the manager of your money. Know yourself, your risk tolerance, and your temperament so that you don’t buy or sell at the wrong times. More than one road leads to Rome. Build your portfolio with a margin of safety for your total return to have peace of mind.

Read the full Seeking Alpha article on preparing for retirement early and having a margin of safety for your total return.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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