Why You May Want to Increase Your Exposure to Stocks After Retirement
By John Whitefoot for Daily Gains Letter |
Life doesn’t stop at retirement; neither should your investment strategies.
Retirement planning isn’t just about tucking money away for retirement and hoping it lasts. It’s about replacing your main source of income once you retire, with other sources of income; preferably with those that continue to generate income.
In the old days (during the 70s and 80s), the retirement rule of thumb suggested that the portion of a portfolio be weighted toward bonds is equal to the investor’s age. This means that if you were 40, 40% would be in bonds and 60% in stocks. When you hit 70, bonds would make up 70% of your portfolio—stocks, just 30%. The older you get, the more you want to have in bonds, because bonds, as the story goes, provide dependable interest.
And back in the day, it made sense to do that. At the beginning of 1979, the U.S. 10-year bond rate stood at 9.1%; at the end of the year, it had risen to 10.4%. By 1981, the rate was an astounding 15.3%. Today, U.S. 10-year bonds pay about two percent. (Source: “Historical US Treasury Bond Rates,” ForecastChart.com, last accessed February 20, 2013.)
If you had a $500,000 portfolio in 1981, you could look forward to receiving $75,000. In 2012, that same portfolio would hand you just $10,000 a year. Toss in the $1,280 a month you receive from Social Security, and you’re looking at an annual retirement income of just $25,000 a year. That’s not much retirement income for anyone to live on.
According to the Federal Reserve, in 2007 (right before the Great Recession) a $100,000 short-term certificate of deposit (CD) would have generated $4,780 in annual income. At the end of 2012, that same CD generated only $190.00 in annual income.
In an era of record low interest rates, it’s time to reassess traditional investment strategies.
By taking “income” out of fixed income, the Federal Reserve has made retirement a constant struggle for many. By investing in bonds and Treasuries, those heading toward retirement could find solace in fixed income returns. It provides holders with stable retirement income; they know what their annual returns will be, and could budget and spend accordingly.
Not so anymore.
For those planning for retirement, low savings account rates mean you have to save more than ever before and live on less.
If retirees want to live on more than the paltry sums that come from bonds and Social Security, they will need to find creative ways to increase their investment.
These days, it’s not uncommon to find bank and utility stocks that provide annual dividends higher than bond interest. Today, a stock with a four or five percent dividend yield would generate as much as $25,000.
With incredibly low interest rates, it’s fair to say that if you want to generate income, you might want to avoid putting a disproportionate amount in bonds.
If you are considering putting a significant portion of your retirement portfolio in stocks, make sure you look at those stocks that have a long history of paying dependable dividends that increase to keep pace with inflation.
Consolidated Edison, Inc. (NYSE/ED) is a utility company that distributes electricity to 3.3 million residential and business customers in New York City, and more than 430,000 electric and gas customers in three Northeast states. The company’s share price has been bullish since 2000, climbing more than 280%. Aside from providing price appreciation, Consolidated Edison has also, for the last 38 years, provided consistent dividend yield growth. Plus, the stock currently pays out an annual dividend of 4.3%.
Altria Group, Inc. (NYSE/MO), a manufacturer of cigarettes (“Marlboro”), smokeless tobacco products (“Copenhagen,” “Skoal”), and wine (“Columbia Crest”), has a long history of price appreciation and providing annual dividends. The company’s share price has been bullish since early 2009, climbing over 200%. Further, Altria provides a dividend of around 5.1%, and has consistently paid out annual dividends for the past 44 years.
Mercury General Corporation (NYSE/MCY) provides automobile insurance products. The company also writes homeowners, commercial automobile and property, mechanical breakdown, and fire insurance products. The company currently provides an annual dividend of 6.3%, and it has been providing higher dividends for more than 25 years.
Now granted, investors shouldn’t consider a stock simply because its dividend yield outstrips the 10-year bond rate. It’s easy to find fly-by-night stocks with high dividend yields that may…or may not be around in a year or two. With any stock, it’s important to understand what you’re investing in and what the long-term outlook is.
These three stocks have excellent business plans, fundamentals, and technicals. They also have an excellent history of providing investors with a solid income stream and capital growth.
Tags: dividend, retirement, retirement income
