Last week I undertook the challenge of designing a $500,000 retirement strategy for people in IRAs or 401Ks that would produce $50,000 per year of current income while maintaining the principal. I said that I would put $200,000 into relatively safe bond funds that were paying about 6% interest and then create three $100,000 stock portfolios with the remaining $300,000.

I used a variation of the Vector + Vector Strategy to create the first $100,000 portfolio and I have named this strategy, "High VST+YSG Stocks." You may find it in the UniSearch Tool located in a new Strategy Group called, "Strategies - Retirement." Since this strategy is restricted to finding optionable stocks, I felt that I could generate at least $15,000 of cash per year from the top 10 stocks it found by selling Covered Calls. Therefore, I could produce about $27,000 per year of current income from the first $300,000 of investment. Now I need to generate an additional $23,000 per year from the remaining $200,000.

In the second $100,000 portfolio, I aim to generate most, if not all, of $11,500 per year of current income directly from dividend payments. This means that I must select high dividend yield stocks that are reasonably reliable. So I created a new strategy called, "High Yield 2x10s." This strategy finds stocks that pay at least a $2.00 per share dividend and have a yield of at least 10%. It sorts by VST+YSG descending. As of last night, it found 25 stocks with American Capital, AGNC, at the top of the list. VectorVest shows it paying a $6.00 dividend with a 20.11% dividend yield. Is that too good to be true? Well, the Dividend Safety, DS, rating of 28 means that the risk of a cut in dividends is relatively high. However, from what I read on Yahoo!Finance, the risk of a cut in dividends is low as long as the Fed keeps interest rates low. I'm willing to take that risk right now, so I own the stock.

The point is that you shouldn't jump into any of these stocks without thoroughly checking into them. Moreover, I would not buy more than one of these stocks in any single Industry Group and no more than two stocks from any Business Sector. Even though the top three stocks all look to be very juicy and have performed very well over the last six months, they are all in the REIT(Mortgage) Industry Group. When I put the 10 highest ranked eligible stocks into a WatchList, I see that the average dividend yield is 13.60%. So these stocks clearly could deliver the income I'm looking for, but they must hold up. Finally, nine of the 10 stocks I selected have options. This is good because it allows me to sell Covered Calls if I wish.

For your convenience we have created a new WatchList Group called, "Retirement Stocks." It contains two WatchLists: one called, "High VST+YSG Stocks," from the strategy I created last week and one called, "High Yield 2x10s," from this week's strategy. A QuickTest of these 10 stocks from 03/26/09 to 09/24/09 shows that they outperformed the VVC 43.13% to 29.62%. That's very good, but they behaved very much like the VVC over the past three years. So the high dividend yields didn't provide much added safety during the down market. Therefore, you can't buy these stocks and forget about them. They need to be managed just like any other stocks.

Next week I'll create the third and final portfolio of stocks in this series; then I will go into some detail on how to manage them. You may find that you can be kept busy managing the portfolio described in today's essay, Retirement Strategy - Part II.

HOW TO GENERATE EXTRA INCOME FROM DIVIDEND PAYING STOCKS.
Research in Motion doesn't pay a dividend and it has a Yield-Safety-Growth Vector (YSG) of zero. So you'll never find it listed as a High VST+YSG stock. That's good because RIMM closed down $14.15 per share today and you won't find too many highly volatile stocks among the High VST+YSG crowd. In a way that's too bad because high volatility makes options premiums very juicy and selling juicy option premiums on dividend paying stocks is a good way to generate extra income. This is exactly what Mr. Todd Shaffer, one of our best Instructors, will demonstrate in this week's "Strategy of the Week" presentation. So join Todd at the VectorVest University to learn "How to Generate Extra Income from Dividend Paying Stocks."