9/15/2011 7:44 PM ET|
5 dividend stocks to buy now
The current downturn in global markets has created a rare opportunity to buy stocks that will pay high income for boomers' retirements.
If you can look past the pain of your losses and the fear that, three years after the Lehman Brothers bankruptcy, the global financial system is about to melt down again, the current market rout is an opportunity. It's an especially important opportunity for investors who are within 10 years or so of retirement and who have been planning to use income from their portfolios to fund part of that retirement.
I don't expect anyone to get giddy at this opportunity. It definitely falls into the "when life deals you lemons, make lemonade" category.
But if you can manage a long-term view that gets your thinking beyond the next quarter or two or three, you'll realize that one of the biggest challenges facing anyone thinking about retirement is where to find decent yields -- and that this sell-off has created some commendable yields in some very good stocks.
It will be a lot easier to put enough money aside to produce the retirement income you need if it's invested in something yielding 6% than if it's invested in something yielding 2%.
Here's the math
If you want to generate $2,500 a month in income from a portfolio -- that's $30,000 a year -- from 10-year Treasurys yielding 2% a year, you need a portfolio of $1.5 million. But if you invested in something paying 6%, then you need a portfolio of just $500,000. That's $1 million that you don't have to save, that you can invest in growth stocks, that you can use for college tuition or that you can spend on a house in Tuscany or wherever. Get the idea?
That's not the only reason to use this crunch as an opportunity to buy higher future yields. I'm also concerned with the likelihood that all the retiring boomers will start looking for income at about the same time. That could create the kind of intense competition for higher yields that bids those yields lower. Part of the reason to buy now is my worry that these higher yields will be extremely rare when everybody and his Aunt Tillie suddenly want to buy them.
I'm going to end this column with a list of five dividend-paying stocks that provide that kind of yield now -- thanks to this not-so-wonderful sell-off. This list is necessarily going to be different from my Dividend Income Portfolio. That portfolio looks for income now -- or at least income over the next 12 months or so. This list is looking to buy yield now for income in five to 10 years.
But I'm going to begin with some general principles and caveats that should guide you in putting together your own portfolio of this kind.
4 rules of income investing
1. Don't reach for current yield but ignore the risk to that yield in the future. It doesn't do any good to buy a 6% dividend now if the company later cuts the dividend and the higher yield isn't around when you need it for retirement in five to 10 years.
2. While you're doing your due diligence on company-specific risk, don't forget the larger macroeconomic risks, such as inflation. I think retirement is likely to be extremely challenging for boomers. We're looking at high odds for rising inflation in developed economies. (Yes, it is possible, I suppose, that governments in developed economies will balance their budgets instead of just printing money. But I'm not counting on it.) Inflation will erode the value of your income stream. That's why I'm advising you to look for income from dividend-paying stocks rather than fixed-income bonds. Dividends can go up over time, while a bond's payout is fixed at the time it is issued. Ideally, you'd like to earn a high yield from a company that is likely to raise dividends over time so you can keep ahead of inflation.
3. Don't forget the basic rules of portfolio diversification when building this high-yield future portfolio. Don't overload with picks from one sector -- even though financials offer an especially tempting target right now. Don't concentrate on a single country, economic zone or currency. Diversification is especially valuable in building a portfolio that's supposed to pay off in five or 10 years. You'll make mistakes, of course. But you should try to make sure that one mistake doesn't take down your entire portfolio.
4. The dollar isn't likely to be a stable store of value over the time period I'm talking about. That's the polite way of saying that persistent U.S. budget deficits, inflationary monetary policies and slow economic growth will steadily erode the value of the U.S. dollar. The best way to fight this that I can see -- given that gold doesn't pay any dividends -- is to put your income-producing investments into the stronger currencies in the world. As the recent devaluation of the Swiss franc through a peg to the euro shows, there aren't any guarantees that today's strong currency will be tomorrow's strong currency. But we can increase the chances of getting it right by looking at currencies from commodity economies or countries where the central banks have been very reluctant to depreciate or where the national government has a history of running a fiscally responsible ship.
Because this last principle is so important, I am tempted to call this the "strong currency dividend income portfolio."
Now, on to the picks (in alphabetical order). The last time I visited this topic, on Aug. 8, I gave you only two stocks -- and one of those, Svenska Handelsbanken, was very thinly traded in U.S. markets (although not in Stockholm). This go-round I'm going to give you five (including the original two), and three of them have good liquidity in U.S. markets.
VIDEO ON MSN MONEY
Jonathan Winters once remarked that life was a [crud] sandwich, but it didn't taste too bad if you had enough bread.
Groucho Marx once was asked how he hope to make any money with his whole portfolio in very low interest short term bonds. "You get rich if you have enough of them," he answered.
Today one cannot plan to make a plausibly attainable amount of capital work very well. And as Mr. Jubak notes, even today's dividends cannot be counted on to be there tomorrow. (At least interest rates won't go much below their current near-zero.)
The only solution is the one that will afforded to only a relatively small group: enough principal that the return on it matters not so much.
I like reading Jubak's articles. He seems to put a lot of research and thought into them. I like his macro economic perspective as well. I have a premium membership on Morningstar and Westpac looks intriguing.
My caveat to all of this is that Jubak's own fund, which started on 6/30/2010 isn't doing well relative to its benchmark. So that makes me a little scared to take his recommendations...
If you are still employed and below the income cutoff, you cut put money into a Roth IRA. I have about 40% of my retirement in my Roth and it is great because I can trade as much as I care to. No capital gains or taxes to worry about as it is in a Roth! Only downside is that you can't write off a loss!
Accountants fear dividends.
They tell investors they will pay taxes.If you don't pay taxes they have done their job. Incorrect,if you have no income,you can avoid paying taxes.A good accountant will help you increase income.
They tell the corporations dividends will reduce their cash hoard which will make it harder to fend off hedge fund short selling.Why would people short sell a profitable company?Here again there's an assumption you must avoid at all costs short selling,instead of seeing a loss of profits as a sign or your product's faults,and your terrible investments in research and development,or you inability to listen to your salesmen who have been warning you about their failures this past year.
This kind of deliberate misinformation clouds the real reason:they're being paid to find depreciation allowances and tax sheltered vehicles.
They also fear a simplification of income forms for their private clients. How hard is it to add together your dividend income versus trying to figure out capital gains tax liabilities.One youc an do with a calculator,the other requires billable hours.
They seem to be good retirement income stocks for sure , note none are short term investments , wish i had read this before i bought my short term stocks and put money into i.r.a now with the extra 10% gov penalties its hard to trade i.r.a @.05%-1.0 % to go after the 5 % plus dividends', which would have to pay out a ton more in ten yrs,
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
- A stronger dollar index weighted on the commodities space today.
- Dec gold and Dec silver fell deeper into negative territory, trading as low as $1263.10 per ounce and $19.11 per ounce, respectively.
- Unable to gain momentum, both metals settled with 1.7% losses, with gold closing at $1264.90 per ounce and silver closing at $19.16 per ounce.
- Oct crude oil fell below the $93 per barrel level. It trended lower after pulling back from a session ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'