2/27/2014 7:45 PM ET|
Are dividend stocks a good bet for retirement?
Many shares have run up too high, but some areas of the market still offer stable stocks with inflation-beating yields to help fund your golden years.
One of the toughest problems retirees face in today's financial markets is how to get a decent yield on our savings. In the old days we could put money in the bank, draw 5 percent interest, and live off the proceeds. Not anymore.
Interest rates have actually gone up a little in the past year. But still, a 5-year Treasury bill pays only 1.6 percent interest. A 5-year bank CD offers less than 2 percent. An intermediate-term corporate bond or bond mutual fund might yield 3 percent, but bonds leave you helpless against inflation.
Other investments can provide better paybacks, but there's always a tradeoff. Master limited partnerships (MLPs), for example, can cast off high yields, but they subject you to a complex tax situation. An annuity can also pay more, but generally does not protect against inflation.
So what about high-dividend stocks? This is not a new idea, and many of the shares have already been bid up substantially by investors, perhaps limiting future returns. But several areas of the market still offer relatively stable stocks with inflation-beating dividends.
We all go to the supermarket to buy shampoo, toothpaste and cleaning supplies. Procter & Gamble (PG) squeezes out a 3.2 percent dividend. Clorox (CLX), the bleach maker, also pays 3.2 percent. Warren Buffett's favorite stock, Coca Cola (KO), pours out a slightly-less-bubbly 3 percent. And do you ever go to McDonalds (MCD)? The company serves up a 3.5 percent dividend.
Are these stocks a good bet? Yes. But remember, you're still betting.
Americans are well aware of the hazards of oil production, from environmental concerns to disruptions in the Middle East. But we need fuel to power our cars and heat our homes, and some of the big energy companies offer decent dividends.
- Also on MSN Money: 7 great stocks for the golden age of dividends
Chevron (CVX), the second-largest U.S. oil company, yields 3.6 percent. Conoco (COP) yields 4.3 percent. Energy companies boost their appeal by providing a well-recognized hedge against inflation. A good bet? Probably as good as you'll find.
Johnson & Johnson (JNJ), Merck (MRK) and Pfizer (PFE) are big, established companies that sell prescriptions, over-the-counter medications and in some cases medical devices. They all pay better than 3 percent dividends. And despite the uncertainties of expiring patents and the Affordable Care Act, one could argue that as long as we need medical care, these companies will remain healthy. A good bet? Probably.
Verizon (VZ) and AT&T (T) ring up solid dividends -- 4.6 percent and 5.7 percent respectively. Both companies generate plenty of cash. But they are facing price pressures from consumers, even while they are forced to make heavy investments to upgrade their networks. Are the dividends safe? Most likely. Are the stocks a good bet? Your guess is as good as mine.
Electric companies traditionally power up retiree incomes. Duke Energy (DUK), Southern Company (SO) and American Electric Power (AEP) all deliver dividends over 4 percent. But most utility stocks have suffered in the past year as interest rates have risen, revealing their weakness: When interest rates go up, these shares go down. A good bet? Only if you think interest rates are not going any higher.
Individual stocks present their own risks, so for many of us an ETF or mutual fund containing high-dividend stocks promises a safer opportunity. For example, Vanguard offers ETFs that cover each of these five sectors, as well as a more general High Dividend Yield (VHDYX) mutual fund with a 2.8 percent dividend payout. Most other major mutual fund companies have their own versions of high-dividend stock funds.
Make no mistake, dividend stocks do expose you to the risks of the market, which can be considerable. Nevertheless, high-paying stocks offer better payouts than bank CDs or government bonds -- and should probably form at least a portion of most retirees' portfolios.
At the time of publication, Sightings owned a small number of shares of VZ and T.
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They are not only a good bet , they are the only worthwhile bet. Who cares if the shares drop when its the Dividend Stream that matters .
But also remember studies show there's almost no chance of losing more than 5% of your principal in 10 years with a diversified portfolio of such stocks. I've gained so much the past few years that if we have a crash like 2008-9, I'll still be ahead of investing in CD's or bonds.
"In the old days we could put money in the bank, draw 5 percent interest, and live off the proceeds. Not anymore."
And we’re all just supposed to accept this as the status quo now and ante up like desperate gamblers to play the next hand.
I’d rather gamble on eliminating the excessive money printing power of the Fed and see what happens, since that’s the reason we don’t get 5% anymore. That’s a risk I’m willing to take.
As a long time investor, I believe it is a wise choice to include some high quality dividend paying securities in your portfolio. When I was younger and did not have a lot of money to invest, one of my investment strategies was to purchase companies that paid a dividend and had a dividend investment plan (DRIP).
Over the years I purchased a number of these types of companies. Even though my initial purchase of the stock was not many shares; over time my investments grew with the reinvested dividends and many small purchases I made through the plan. Every few years I would purchase a different security to add onto my stock selection.
I have seen my stock portfolio grow and my dividend income increase substantially. I continue to reinvest the dividends in these DRIP plans and when I get closer to retirement I will change my stock election to receive all cash instead of purchasing stock. I have made sure my investments are varied and not in one sector of the market. I have also made sure that I am well diversified so my investments include a range of stocks, bonds, mutual funds, REITS, and other assets.
Having high quality dividend paying stocks is just one arrow in my retirement and investment quiver. I found it an important part of my strategy and a good bet for anyone’s retirement and investment plan.
Quality dividend stocks will give you some income while still having the potential for capital appreciation.
A slightly safer way to select dividend stocks is to choose from the so-called 'Dividend Champions'; those which have INCREASED dividends each year for, at least, 25 consecutive years. If one were to reinvest those dividends (not paying any commission) they have the additional benefit of slightly rebalancing the portfolio since fewer shares are purchased when the companies' share prices are higher. Today's 2.5% dividend will probably grow to a 5% yield (on original investment) in 5 - 7 years with those dividend increases.
For those who have the foresight to build their retirement accounts (hopefully, Roth) early in their careers, they will be able to live off the dividends only and not have to touch the underlying shares. For the rest of us, the big decision has always been (not which companies to buy but) which shares should we sell to get the money needed in retirement; still keeping those share which will throw off the highest (and growing) dividend payouts.
The problem with this article is it treats sectors as the things to consider rather than the long term record of each of the dividend stocks, particular how steady their growth is, if they've piled up a lot of long term debt, if their Return on Equity is steady or growing, and VERY importantly if they have durable competitive advantages that will keep them rolling along.
Some diversification is worthwhile. For example, some of my holdings are General Mills, Abbott Labs, Abbvie, Wells Fargo, Cracker Barrel Old Country Store, Procter & Gamble, Exxon, Southern Company, Emerson Electric, HCP [Medical Property REIT] and AT&T. Will they beat the market long-term? I don't know. Will I lose money in the next decade with them? Almost surely not. My stocks average a 3.6% yield. Even if they only grow eps at 5% per year I'll be happy.
Methinks that someone got up off the wrong side of the bed this morning.
Cool down before you bust a blood vessel.
add in the fact that the Fed has now abandoned the idea of keeping the stock prices up and you are going to have a correction down to zero soon by Sept 15, 2015.
Just one more example of miss guided Government policy. Like the US protecting the Ukrainian border while allowing illegal aliens to invade our borders. Go figure.
Preferred shares frequently have higher yields than common. But look for good, ethical management.
You can ladder them with redemption dates.
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