Many investors understand the basics of growing a portfolio that can see them retire comfortably. However, Australian demographics are changing, with many people living longer than they expected to, post-retirement. As a result, it is becoming more important that people learn how to invest after retiring, to ensure that they can live comfortably.
Here are some ideas and concepts to help you develop a post-retirement investment strategy.
Generate equity income through dividends
Traditionally, the average investor is trained to compile a portfolio of solid, blue-chip stocks and budget their lifestyle according to the dividends that they pay. I think this is an important part of building a portfolio after retiring as it sets a solid foundation.
Conventional wisdom has made the banking sector a favourite among investors looking for dividend yields. According to the Janus Henderson Global Dividend Index, the big four banks accounted for 41% of dividend payments. However, dividends from the big four banks have become unsustainable and they will look to cut their pay-out over the medium term.
Instead, it is important for investors to look for companies that are growing and not confined to defensive or cyclical yield categories. CSL Limited (ASX: CSL) is a classic example of such as dividend stock. CSL boasts a unique business model that has performed over the long term and is a core holding for many institutional investors. The company has an impressive track record of compounding income, with its dividend pay-out rate more than doubling since 2013.
Take advantage of cycles
Commodity stocks, like those exposed to gold and ion ore epitomise cyclical stocks. The share price of these companies fluctuate in cycles in accordance with commodity supply and demand. Despite the relative volatility associated with these stocks they do offer great potential for profit.
Recently, the surging iron ore price has served as an example, supercharging the share price of the big miners. BHP Group Ltd (ASX:BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) all hit highs this year that had not been seen since the GFC. In addition, the surge in commodity prices saw both BHP and Rio pay gross yields of more than 13% for 2019.
In order to catch these cycles, investors must stay attuned to external and internal factors and most importantly not be afraid to sell when the time is right.
Let LICs do the heavy lifting
In my opinion, listed investment companies (LICs) can be an excellent option for investors looking to expose their portfolio to different investment strategies, sectors and asset classes. These companies are exposed to a various portfolio of stocks, which are selected by seasoned financial experts. They also pay attractive dividends and have generous share price growth prospects.
An excellent example is Milton Corporation Ltd (ASX: MLT). The Milton Corporation portfolio provides investors with a growing, fully franked income stream. The company focuses on a long-term timeframe and is heavily weighted towards large cap stocks on the ASX. Milton uses in-house and external research to devise investment opportunities that are approved by an investment committee.
These suggestions are by no means a fool-proof blueprint for investing after retiring. However, I hope they do provides investors with a new way of approaching their retirement portfolios and get people thinking about investing after retiring.
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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.