Step 1: Forget “Buy and Hope” Investing

Most half-million-dollar stashes are piled into “America’s ticker” SPY.

The SPDR S&P 500 ETF (SPY) is the most popular symbol in the land. For many 401(K)’s, this is all there is.

And that’s sad for two reasons.

First, SPY yields just 1.2%. That’s $6,000 per year on $500K invested… poverty level stuff.

Second, consider 2022 for a moment (and only a moment, I promise!).

SPY was down nearly 20% that year. That is no bueno, because that $500K would have been reduced to $400K.

The last thing we want to do is lose the money we’re getting in dividends (or more) to losses in the share price. Which is why we must protect our capital at all costs.

Step 2: Ditch 60/40, Too

The 60/40 portfolio has been exposed as senseless.

Retirees were sold a bill of goods when promised that a 60% slice of stocks and 40% of bonds would somehow be a “safe mix” that would not drop together.

Oops.

Inflation — plus an aggressive Federal Reserve, plus a (thus far) persistently steady economy — drop-kicked equities and fixed income before they went on a serious bull run in 2023 and 2024.

It just goes to show that bonds are not the haven guaranteed by the 60/40 high priests. They could easily plunge just as hard (or harder) than stocks in the next economic crisis.

Just like they did in 2022 (sorry, we’re only going to spend one more second on that disaster of a year). US Treasuries plunged, which resulted in the iShares 20+ Year Treasury Bond ETF (TLT) getting tagged.

Sure, it still paid its dividend. But even including payouts, the fund was down 31% — worse than the S&P 500. Ouch!

When stocks and bonds are dicey, where do we turn? To a better bet.

A strategy to retire on dividends alone that leaves that beautiful pile of cash untouched.

Step 3: Create a “No Withdrawal” Portfolio

My colleague Tom Jacobs and I literally wrote the book on a dividend-powered retirement.

In How to Retire on Dividends: Earn a Safe 8%, Leave Your Principal Intact, we outline our “no withdrawal” approach to retirement:

  1. Save a bunch of money. (“Check.”)
  2. Buy safe dividend stocks with big yields
  3. Enjoy the income while keeping the original principal intact.

To make that nest egg last, and our working life worthwhile, we really need yields in the 7% to 10% range. We typically don’t see these stocks touted on Bloomberg or CNBC, but they are around.

Of course, there are plenty of landmines in the high-yield space. Some of these stocks are cheap for a reason. Which is why we need to be contrarian when looking for income.

We must identify why a yield is incorrectly allowed to be so high. (In other words, we need to figure out why the stock is priced so cheaply!)

As I write, the top 10 payers in my Contrarian Income Report portfolio yield about 10.6% on average.

On every million dollars invested, this dividend collection is spinning off an incredible $106,000 every single year!

And you don’t have to be a millionaire to take advantage of this strategy.

A $750k nest egg will generate $79,500 annually…

$500K could hand you $53,000…

You get the idea.

The important thing is that these yields are safe, which creates stability for the stock (and fund) prices attached to them.

We want our income, with our principal intact.

It’s really the only way to retire comfortably, without having to stare at stock tickers all day, every day.

Now, many blue-chip yields are safe. They just need to hit the gym and bulk up a bit. Here’s how we take perfectly good, yet modest, dividends and make them into braggarts.

Step 4: Supersize Those Yields

Mastercard (MA) is a near-perfect dividend stock. Its payout is always climbing, having nearly doubled over the last five years. (MA shareholders, you can thank every business that accepts Mastercard for your “pennies on every dollar” rake.)

Tap, tap, tap. Remember cash? Me neither. Another 2020 casualty, with Mastercard making a few dimes or dollars on every plastic transaction.

The cashless trend has been in motion for years. But international growth prospects remain huge. Just a few years ago, 80%+ of transactions in Spain, Italy and even tech-savvy Japan were in cash.

We expect more dividend hikes as more cash turns to plastic. Or skips plastic entirely and goes straight to e-transfers. Mastercard and close cousin Visa (V) nab a nice piece of that action, too.

The only chink in MA’s armor? Everyone knows it is a dynamic dividend stock. So it only yields 0.5%. Investors keep bidding it higher, knowing that the next dividend raise is just around the corner.

So, the compounding of those hikes makes MA a great stock for our kids and grandkids. You and I, however, don’t have the time to wait for 0.5% to grow. And $2,500 on a $500K investment simply won’t get it done.

Let’s instead consider top-notch closed-end fund (CEF) Gabelli Dividend & Income Trust (GDV), managed by legendary value investor Mario Gabelli.

Mastercard is one of Gabelli’s largest holdings. But we income investors would prefer GDV because it boasts a healthy dividend right around 6.8%, paid monthly, nearly 14 times what Mastercard pays (and this is low in CEF-land; other funds, like the next one we’ll talk about, pay nearly double that).

And today, thanks to the conservative folks who buy CEFs, we have a rare opportunity to buy Mario’s portfolio for just 87 cents on the dollar.

Yup, GDV trades at a 13% discount to its net asset value, or NAV. It’s a way to boost MA’s payout and snag a discount, too.

Where does this discount come from?

CEFs are like their mutual fund cousins, with one exception: they have fixed pools of shares, so they can (and do) trade higher and lower than their NAVs, or “fair” values (the value of their holdings minus any debt).

As contrarians, we can step in when they are temporarily out of favor, like after a pullback, when liquidity is low, and buy them at generous discounts.

GDV holds more blue-chip dividend payers alongside MA, such as American Express (AXP), Microsoft (MSFT) and JPMorgan Chase & Co. (JPM). And with GDV, we have an opportunity to purchase them at a 13% discount.

These high-quality stocks wouldn’t normally qualify for our “retire on $500K” portfolio because everyone in the world knows they are strong long-term investments.

Even though these companies are constantly raising their dividends, constant demand for their shares keeps their prices high (and current yields low). So they never meet our current-yield requirement.

GDV does. The fund pays a monthly dividend that adds up to a nice 6.8% annual yield.

Let me give you one more idea (and this is where that much larger payout comes in): the Eaton Vance Tax-Managed Global Diversified Equity (EXG) is another CEF with a similar blue-chip dividend portfolio.

But EXG generates even more income than GDV by selling covered calls on the shares it owns.

More cash flow means a bigger dividend — and EXG pays an already terrific 9.4%!

So we buy and hold EXG and GDV forever, collecting their monthly dividends merrily along the way? Not quite.

In bull markets, these funds are great. But in bear markets, they’ll chew you up.

Step 5: Protect That Principal!

My CIR readers will fondly recall the 15 months we held GDV and EXG together, collecting monthly dividends plus price gains that added up to 43% total returns.

What was happening in that period, from October 2020 until February 2022? The Federal Reserve was printing money like crazy. Not only did the Fed stoke inflation, but we also enjoyed an asset-price lift.

Starting in 2022, we had the opposite situation. The stock market was topping, and we didn’t want to fight the Fed. We sold high, and by late 2022, both funds were down sharply:

We Sold EXG and GDV Just Before They Plunged

For whatever reason, “market timing” is a taboo phrase among long-term investors. That’s a shame because it is quite important.

By aligning our dividends with the market backdrop, we can protect our principal from bear markets.

Step 6: Start Here to Retire on $500K

So if the “tried and true” money advice — like the 60/40 portfolio and the 4% rule — has been properly exposed as broken…

Where do we go from here?

Well, imagine your portfolio in just a few days or weeks from now spinning off 8%, 9% and even double-digit dividends with the reliability of a Swiss watch… with many of my recommendations paying every single month no less!

No more worrying how much is coming in next month.

No more worrying about the Fed’s next move.

No more worrying about outliving your nest egg.