Published on January 23rd, 2025 by Bob Ciura
“Under conditions of complexity, not only are checklists a help, they are required for success.”
– Atul Gawande, The Checklist Manifesto
When you get right down to it, there’s a great deal of complexity for selecting securities for your retirement income portfolio.
This email includes a concise checklist for identifying suitable retirement investment securities.
This greatly simplifies and speeds up the process of finding the right securities for your portfolio.
The 7 criteria checklist is below.
Criteria #1: Dividend Yield
Any stock you consider should have a yield at least equal to the threshold yield you need in your retirement portfolio.
If you require a 4% yield, the securities you look at should yield 4% or more. This builds in a margin of safety as you only add securities at or above your minimum yield threshold.
For this reason, we steer investors toward high dividend stocks.
High dividend stocks are stocks with a dividend yield well in excess of the market average dividend yield of ~1.3%.
The resources in this report focus on truly high yielding securities, often with dividend yields multiples higher than the market average.
Resource: The High Dividend Stocks List Spreadsheet
The free high dividend stocks list spreadsheet below has our full list of ~140 individual securities (stocks, REITs, MLPs, etc.) with 5%+ dividend yields.
You can download the full list of high dividend stocks by clicking on the link below:
Note 1: To find the minimum yield you require from your portfolio, first find your average monthly expenses over a year. Then subtract out income you receive from alternate sources, like social security. Divide your expenses less other income number by your portfolio size to determine your yield threshold.
Note 2: If you aren’t yet in retirement and are building your portfolio, determine your minimum yield threshold by estimating your portfolio size and expenses on your expected retirement date, and work backwards. There’s greater flexibility here, so an absolute yield threshold isn’t as critical.
For a rule of thumb, a 3% yield threshold for those building a dividend growth portfolio leaves plenty of quality dividend growth options while maintaining a reasonably high portfolio yield.
Criteria #2: Dividend Safety
A dividend that isn’t likely to continue into the future simply can’t be relied upon. For dividend safety, we recommend that a security you are considering match the following requirements:
- Payout ratio under 90% at a minimum, and preferably much lower
- No dividend reduction during COVID
- Ability to easily service debt
- Dividend covered by cash flows (except for utilities, financials, and quasi-utility securities due to their business models) and earnings
These minimum criteria will help you avoid securities likely to reduce their dividend relatively soon.
For stocks with high dividend safety, look no further than the Dividend Kings, a group of 54 stocks that have each raised their dividends for over 50 consecutive years.
You can see the complete Dividend Kings list here.
The most important factor, by far, is the payout ratio. The lower the payout ratio, the better. A 90% payout ratio is only secure for the most stable business models. A payout ratio well under this is much preferable.
Criteria #3: Dividend Growth
A stagnant dividend is not acceptable. The reality of inflation means that the purchasing power of a stagnant dividend is actually declining.
Looking at historical dividend-per-share and earnings-per-share growth, as well as expected earnings-per-share growth and dividend-per-share growth in the future is a good way to get comfortable with a securities dividend growth.
A long history of steadily rising dividends is also a very good sign that future dividend growth is likely. Looking at the earnings stability of a security also helps to know if it will be able to pay rising dividends throughout the economic cycle.
Criteria #4: Portfolio Fit
Does the security fit in your portfolio? If half of the securities in your portfolio are in the energy sector, then it makes little sense to add another energy sector security.
The exact portfolio weight limit for any sector is up to the individual investor, but something in the 25% range to 35% (for stable sectors like consumer staples) makes sense in our view.
Criteria #5: Individual Fit
Is the security right for you? Some people feel uncomfortable investing in tobacco companies. Others may feel uncomfortable with some big health companies or consumer staple securities that sell addictive and sugary products.
If a company doesn’t agree with your ethics, don’t invest in it.
Second, if a security is outside your circle of competence, then skip it. By this, we mean if its business model is too difficult to understand.
If you don’t really understand how a business makes money then you are less likely to hold during down periods as you won’t be able to diagnose if the issue the security is facing is temporary or permanent.
It’s better to avoid these situations than pretend we “know it all”.
Criteria #6: Valuation
Is the security trading around or below fair value? Investing in securities trading far above fair value puts your capital at risk because the security has the possibility of “mean reverting” to its historical fair value over time, causing losses.
In general, we prefer to invest in securities trading below their 10 year historical average price-to-earnings ratio. One should assess fair value first, and then invest only when the security in question is trading at or below fair value.
Criteria #7: Expected Total Returns
Finally, we recommend investors look for securities with high expected total returns, and screen out securities with lower expected total returns.
Expected total returns are approximated as the sum of annualized valuation multiple change, growth on a per share basis, and dividend yield.
We recommend investing in securities with expected total returns of 10% or greater. The market has historically averaged total returns of ~9% a year for comparison.
Final Thoughts
The seven criteria checklist above will generate a portfolio of safe and growing high yield securities trading at fair or better prices with solid and better expected total return potential.
While the criteria above are useful, they can still be timely to implement.
Additional Reading
The following articles include plenty of additional high-yield stocks that regularly pay rising dividends:
- The 20 Highest Yielding Dividend Aristocrats
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks