Toronto Team  

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From Worker to Retiree

I was reminded today how difficult it can be for some people to move from worker to retiree, while others make the transition easily. There are those who devoted their careers to their employer(s) and who found it difficult to separate their corporate self from their personal self. So when the time came for retirement, they had difficulty.

Take the mid-70 year old, whose career has spanned over 50 years and who still works full-time and volunteers in industry-related activities. There are essentially three buckets that take up his time – his job and two volunteer positions. He thrives on discussion of what’s happening in his field and relies on his contacts to remain current. But he’s starting to feel that it’s time for change. When we talked about giving up one of the time buckets there seemed to be a reason why each carries unfinished business to be seen through to the end. As our discussion continued, I asked what a day would look like if some of the current activities were not part of the picture. There was real concern over how the hours would be filled – not really interested in playing a lot of golf, doesn’t play bridge, isn’t handy around the house, likes to travel, but you can only do so much. The things that he sees his peers doing are not for him. And you can only walk the dog (if the recently departed dog is replaced) so many times in a day. I mentioned other volunteer activities that can be meaningful, including delivering Meals on Wheels, visiting shut-ins, or driving seniors to appointments. Shortly after our meeting, I received an email that he has resigned from one of the three “buckets”. One step at a time.

In another situation, I was worried that early retirement at 60 by a client who had served in senior executive positions with a multi-national corporation would not know how to spend her time. She lived and breathed for her work. Was I wrong on this one! Now in her fourth year of retirement, she is doing those things she never had time for - exploring Toronto’s diverse neighbourhoods, subscribing to theatre and music productions and volunteering within the arts community. In between, she travels extensively, taking time in each place to learn about and absorb the culture. 

But there is one common thread in these two cases. Both hated the thought of using their savings. It was as if their lifestyle had to suffer at the end of the paycheque. No matter how many projections we ran showing that these clients are financially independent, they didn’t see it. Both felt they would need to sell their homes to reduce their costs. So what to do? Well, in the case of the 60 year old, we have taken steps to replace the salary with a monthly income stream made up of some annuities (yes, annuities do have their place) and some withdrawals from other investments. (We invest on a total return basis, so don’t think in terms of withdrawing only investment income.) The case of the mid-70 year old is still in process, but strategies are taking shape to supplement defined benefit pension income. 

All of which goes to show us that no matter what the numbers say, human behaviour is a stronger driving force in the profession of financial planning. Being able to recognize the stumbling blocks and suggest strategies to overcome them is a key part of our role.

By: Kathleen Clough | 2 comments

Should I buy dividend paying stocks?

Why wouldn’t I hold dividend-paying stocks – they pay me while I wait for the market recovery. There is certainly a strong behavioural bias here, but the academic studies and math don’t support this premise.

Dividends are only part of the story when it comes to stock performance. The other is the potential for increase in value. Total return is key.

Consider what a dividend is – the company has made a profit and the board of directors decides to distribute its profits to the shareholders. Instead of paying a dividend, the Board could decide to keep the cash in reserve, reinvest it in the company through research and development or new fixed assets, pay down debt or buy back some stock. All of which should increase the value of the shares – thus returning profits to the shareowners in the form of capital gains. Paying a dividend is not the only option and may not be the right thing for management to do for the health of the company.

Now consider the math – if a company, whose stock is trading at $50, declares a $1 dividend, the value of the stock should decline by $1 since payment of the dividend will reduce the cash reserves of the company. If the dividend is not declared, the stock value would not change based on this criteria.

Over the years, the percentage of publicly listed companies paying cash dividends in the US has reduced from 66% in 1978 to only 20% in 1999¹. And those 20% likely represent 70% of the total market value. So if you focus only on dividend paying companies, you also focus on large companies. 

Something to bear in mind - there are a number of well-known companies which do not pay dividends – Google, Amazon, Apple and Berkshire Hathaway, to name a few. 

Similarly, if dividend-paying companies are perceived as being “safer”, why should they have a higher expected return? If the risk is perceived to be low, the return should also be expected to be relatively low. Risk and return are related.

Academic research supports the concept of value companies outperforming growth companies, over time, and smaller companies outperforming larger companies, over time  – recognition of the higher risks involved with small and value holdings.  

All of which draws me to the conclusion that PWL’s approach to portfolio construction, which includes exposure to various asset classes based on an allocation designed for our client, makes sense.

¹Fama, Eugene F., and Kenneth R. French. 2001. Disappearing dividends:  Changing firm characteristics or lower propensity to pay?  Journal of Financial Economics 60:3-43.

By: Kathleen Clough | 0 comments