Annuities can provide a steady reliable source of income for someone who is not working perhaps due to retirement. Basically, you buy an annuity and it pays you a set amount on an agreed schedule for an agreed length of time. When that time is up, the original principal invested stays with the annuity’s issuer. Often the length of time is until the buyer dies. But what if you want the steady reliable payments but you don’t want to permanently hand over your principal? Is there some way to buy that?
A Reasonable Facsimile for an Annuity
So far I haven’t found any product that is the same as an annuity but that doesn’t use up your principal. I have found what advertisers used to call a “reasonable facsimile” though. It looks a bit like an annuity and works a bit like an annuity but it isn’t one.
For this to Work You Should Act as if You’re Buying a Vacation
If you’d asked me ten years ago if I had any stocks I would have said no. Then, after thinking for two or three minutes I might have corrected myself and said “well actually yes I do. But not real stocks.”
My confusion would have stemmed from the way I acquired those two stocks. Many, many, many years ago, I bought stock in my employer when it was privatized. As a then resident of Alberta, I also bought a small amount of Alberta Government Telephones when it privatized. (You may know it better by its current incarnation “Telus.”) In both cases when I bought the stocks I never expected to sell them again. They were impulse buys and I thought of them the same as if I had spent money on a vacation. It seemed like a good way to spend the money at the time and I’ve never thought much about it ever since.
If you are seriously interested in this “facsimile” of an annuity, you’d have to do the same thing. You’d have to consider the money you spent as being “almost” as gone as if you’d bought a true annuity. You’d have to go in with the possibility that you might never see or touch that money again.
You’d Also Have to Be Prepared for a Possible Drop or End to your Payments
If you buy an annuity from a well-respected source, part of the payment is insured. If the company issuing the annuity goes bankrupt you’re guaranteed to get at least a portion of your regular payments.
If you buy an annuity from a fly-by-night source, however, you might lose the whole thing if the issuer goes bankrupt.
Some people still choose this second option, especially if the proposed annuity payment is much higher than a well-insured one.
If you’re going to buy into this “facsimile” annuity you’d also have to be prepared that the payments could drop or could stop. How likely it is for the payments to be at risk depends on from which issuer you choose to buy your payments.
Have You Guessed the Nature of the Facsimile Annuity Yet?
Yes, the reasonable facsimile is a collection of dividend paying stocks.
Your principal might be recoverable unlike with a true annuity because you might be able to sell your stocks to get back all or part of your principal.
Your payments would not be guaranteed to stay the same or to continue because some companies do cut their dividend payments and some do stop paying dividends.
The risk of a dividend being cut or stopped can be estimated for a stock if you look at its dividend history and its current and announced company plans. Some companies are well aware that their investor-base is people who need steady, reliable income. If their business plan tends to produce steady reliable profits they usually plan on maintaining their historical approach to paying dividends.
Why I Forgot I Own Two Stocks
This brings me back to the two stocks I owned and actually forgot about. One of the stocks plummeted to half its value within a couple of years of when I bought it. From that point forward, I never included it in any estimates of my net worth. The other was such a small amount of stock it would be like counting the contents of my childhood piggy bank.
While I forgot about these stocks as “investments” or “capital gains plays” I never forgot they pay dividends. In fact, out of curiousity I recently worked out the yield for these stocks based on what I paid to acquire them all those years ago. (I didn’t factor in inflation or the lost time-value of that money. I kept it simple and just divided how much I get per year now by how much I paid in cash back then. This is not good math. It was just fun.)
The shares are now yielding 8% and 18% per year on their initial investment. That’s substantially better than the current yield for someone buying the same stocks today. Which is good because the increase is supposed to help cover some of the rate of inflation. (In fact when I compared it against the CPI increases for those years, the increase has been higher than inflation.)
Both stocks have also enjoyed large capital gains over the years. But since I have never sold the stocks and since I act like the money I paid for them is long gone, that’s not actually relevant. If I’m still holding them when I die, though, my survivors may be pleased. They could donate some of the shares to charity and use the tax credit to help offset some income taxes on the rest of my estate.
How Can I Pick the Stocks to Buy for my Facsimile Annuity?
Ah, now there’s a difficult question. I’ll have to get back to you on that with another post. In general, though, you’d be looking for a stock that has
- paid a dividend for many years without interruption
- is a business that tends to have a steady profit, such as a utility, financial or telecomm business
- preferably has increased the dividend steadily to keep up somewhat with inflation
- does not jeopardize its own survival just to pay a large dividend
- Using Dividend Paying Stocks to Create Monthly Income
- Can I Buy the Day Before the Dividend and Sell the Day after and Make Money?
- What Stock Pays a 17% Dividend Only Yield?
Do you have any stocks that you purchased primarily as income-generating investments? Have you been satisfied with your choices? Please share your words of wisdom and warning with a comment.