PERSONAL FINANCE COMMENTARY
Build Wealth No Matter What
By John RosevearDecember 4, 2008
I had agreed to meet her in a cafe, a little place downtown where we could be anonymous. I knew she was in danger. Grave danger.
But I didn't know how bad it was, until she started talking.
"I'm in cash," she said. She looked at me across the table. Her deep blue eyes were both proud and tentative. "I sold everything at the end of September."
She was hoping for my approval. She wouldn't get it. I sipped my quintuple espresso and waited.
After a minute she went on. "I'm going to wait until the market turns. It's too crazy for me." Her voice wavered, just a little.
I kept my face impassive. Holding cash in a recession is a dangerous business. The markets tend to turn when you least expect it, while the economy is still bad, and when they turn it happens hard and fast. Miss that first leg up and you could be chasing them for the rest of your life.
She needed help and she needed it right now. My kind of help.
I put my drink down. "You're in more trouble than you know. Those money market yields will kill your retirement hopes. I can make it better, but it's going to cost. It might seem scary. But it's the only way."
Her eyes widened. The facade was starting to crack. "But ... trouble? What can I do?"
"Get some dividend stocks in that portfolio. Today."
Why dividends are the answer
Here's the problem: The economy's bad and it might get worse. The market has crashed harder than a 22-car NASCAR pileup. Interest rates and Treasury yields are microscopic. All of this will turn around at some point, but nobody knows when.
Growth stocks could go far lower before starting their recovery. Bonds will give you income now but not much chance of capital appreciation later. Staying in cash is safe, but not much more profitable than stuffing the money in your mattress.
You know all that. But dividend stocks give you a way around it. If you buy the right dividend stocks, you get three things:
Dividends! Whether the stock's price goes up or down, you make money from those quarterly dividends. To my mind these are the perfect IRA investments -- reinvest the dividends, think long-term, and watch your balance grow. If you're reinvesting dividends, there's no need to lose sleep if the stock's price goes down further; the dividends will automatically dollar-cost average on your behalf. And over time, reinvested dividends plus the stock's price appreciation can add up to very impressive returns.Low downside. If you buy established, well-run businesses with the ability to sustain their dividend payments through tough economic times, your downside is limited -- especially if you buy them at today's prices. Generally speaking, the prices of these stocks tend to be less volatile than those of the big-name highfliers, and the dividend gives you an extra cushion against any decline.You'll be holding stocks when the market turns. Enough said.And today's prices, as noted, have produced some eye-opening dividend yields. I just did a quick screen on Motley Fool CAPS for promising stocks with strong dividend yields. As a starting point for further research, you could do a lot worse than this list:
Stock
CAPS rating (out of 5)
Dividend yield
AGL Resources (NYSE: ATG)
*****
5.8%
Anglo American plc (Nasdaq: AAUK)
*****
6.7%
DuPont (NYSE: DD)
****
6.9%
Gerdau (NYSE: GGB)
*****
5.9%
Telekom Indonesia (NYSE: TLK)
*****
8.5%
Seagate Technology (NYSE: STX)
*****
10.9%
Ternium (NYSE: TX)
*****
7.6%
At first glance, all of these have definite strengths. But as I said, this list is just a starting point for further research. Figuring out whether a company is a good buy in the face of a protracted recession isn't a simple business, especially with foreign companies. But it's not impossible. It's something we can do.
How? I'm glad you asked.
How to pick the best stocks
In this month's issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. ET today, Fools James Early and Joe Magyer offer a complete tutorial in the art and science of investing in dividend stocks. James and Joe pick dividend stocks for a living -- they're the advisor and senior analyst, respectively, for the Fool's dividend-stock newsletter -- and their market-beating success speaks for itself.
If you'd like to get better at picking stocks for your IRA, this great article -- which assumes no special knowledge on your part, and includes several stock recommendations to get you started -- is a must-read. If you're not a Rule Your Retirement member, just help yourself to a free 30-day trial by clicking here. You'll have full access in seconds, with absolutely no obligation to subscribe.
A Fast Fix for Yield-Hungry Investors
By Dan CaplingerDecember 4, 2008
Stock investors have taken it on the chin this year. So you'd think that people with a big chunk of their money in bonds would have little to complain about. While most stocks are down, the value of Treasury bonds has risen sharply in 2008 -- exactly the counterbalance you'd want from a diversified portfolio.
Yet despite the vital role high-quality bonds have played in preserving capital for conservative investors during the bear market, there's a trade-off. Recently, the yields on those bonds have gotten extremely low, jeopardizing the income on which so many investors rely.
Bonds and your retirement
During their peak earning years, most investors don't pay much attention to how much income their investments generate. After all, when you're trying to build wealth for the long run, you typically want to reinvest that income back into your portfolio so it can grow even more.
But as you approach retirement, making sure you can live off your investment portfolio becomes much more important in figuring out when you can afford to retire. And after you quit working, your retirement lifestyle depends on a steady and reliable stream of income you can use to supplement your Social Security and pay your living expenses.
That's why this month's brand new issue of The Motley Fool's Rule Your Retirement newsletter, available today at 4 p.m. ET, takes a hard look at the strange behavior within the bond markets. Treasury yields have fallen precipitously, with payouts below 3% on all but the longest-maturity bonds. Yet curiously, the yields of other types of bonds, such as corporate and municipal debt, have actually risen throughout the crisis.
How to manage your income
It's a strange phenomenon. Municipal bonds, which pay tax-free income, are actually paying higher yields than their taxable Treasury counterparts. Meanwhile, corporate debt trades at huge spreads to Treasuries, showing just how worried investors are about the risk of default during the recently-declared recession.
You don't have to put up with lousy income payments from Treasuries. Instead, you have several better choices -- and the one I like most right now is buying shares of blue-chip dividend stocks.
Where the income is
As Fool retirement expert Robert Brokamp notes, the total dividend yield on the S&P 500 now exceeds the payout on 10-year Treasuries by a fairly wide margin. That's not unprecedented, but it has been 50 years since payouts on stocks were so generous compared with bonds. Just look at some of the yields available on cream-of-the-crop companies:
Stock
Dividend Yield
1-Year Return
Chevron (NYSE: CVX)
3.5%
(11.6%)
Home Depot (NYSE: HD)
4%
(18%)
Coca-Cola (NYSE: KO)
3.3%
(24.3%)
Lockheed Martin (NYSE: LMT)
3%
(28.1%)
McDonald's (NYSE: MCD)
3.4%
2%
Wells Fargo (NYSE: WFC)
4.8%
(7.8%)
Wyeth (NYSE: WYE)
3.5%
(26.4%)
Source: Yahoo! Finance. Yields and return reflect closing price on Dec. 3, 2008.
As you can see, healthy yields of 3% or more are available on a wide range of strong companies in many different industries. So if you're looking for more income from your portfolio, stocks like these could not only boost your earnings but also give you some potential for capital gains down the line.
Safer alternatives
Of course, if you're retired, you definitely don't want to move all your money into stocks. Just looking at the one-year returns in the stock table above should remind you that stocks are risky -- and you don't want to take risks with the money you'll need to spend in the coming years.
But even if you don't need any more dividend stocks, the right mix of other investments can boost your income above what Treasuries pay. Inside this month's Rule Your Retirement, you'll find specific recommendations about where to move your money now, based on your income needs, risk tolerance, and current holdings.
That's exactly the kind of advice we offer every month to subscribers. If you want to get a sneak peek at the service, though, it's easy -- just take advantage of our 30-day free trial offer. You'll get full access to the new issue as well as every other resource we have for investors. Given how difficult today's markets are, the knowledge you gain might be what turns your losses into profits.
For more on how to retire well, read about:
beat the recession.The best way to battle the bear.A retirement ripoff you can't afford.Supercharge Your Income With These Stocks
By Todd WenningDecember 4, 2008
It's no secret that dividend-paying stocks are an essential part of any retirement portfolio. According to the Investment Company Institute, for example, more than half of investors over the age of 65 invest primarily for income. IRS data reveals that 59% of 2004 tax returns with qualified dividends came from investors aged 50 and up.
But all too often, investors believe that dividend-paying stocks are best-suited for people already in retirement. The same IRS data showed that only 15% of returns with qualified dividends came from investors under the age of 35 -- and that's a shame.
Dividend-paying stocks really show their merit with two things: time and reinvestment. And that means that only investors with lengthy time horizons can really take advantage of them to supercharge their retirements.
Talk about some extra scratch!
Consider a modest $1,000 investment in Johnson & Johnson back in July 1980. A year later, the investment would have been up 35% and paid another $50 in dividends. Holding on for the long run, however, would have returned quite a bit more:
Original Number of Shares
Shares Today
Value Today
Total Return
Annual Dividends Today
13
602
$34,530
3,353%
$1,108
But with dividends reinvested -- which only those investors who have other sources of income, like a salary, can do -- the returns are substantially better even than that:
Original Number of Shares
Shares Today
Value Today
Total Return
Annual Dividends Today
13
1,085
$62,214
6,121%
$1,996
Source: Johnson & Johnson Investor Relations, as of Dec. 4, 2008.
You didn't have to be a market genius to buy J&J in 1980. It was already a well-known blue chip with a proven track record of paying -- and increasing -- dividends.
Time and dividend reinvestment provided 483 additional shares, an extra $888 in dividend payments in 2008 alone, and a nearly doubled total return -- and a stronger retirement portfolio.
Finding the next dividend payer
To make the same kind of investment today, you need to find strong, stable companies with a history of regular and increasing dividend payments. One place to look is the Mergent Dividend Achievers Select index, which includes only stocks that have increased their dividend payments for the last 10 or more consecutive years.
Here are a few of the stocks it includes:
Company
Current Yield
Emerson Electric (NYSE: EMR)
4.1%
Target (NYSE: TGT)
2%
Colgate-Palmolive (NYSE: CL)
2.6%
Eli Lilly (NYSE: LLY)
5.7%
Stryker (NYSE: SYK)
0.9%
Chubb (NYSE: CB)
2.8%
Sysco (NYSE: SYY)
4%
Source: Yahoo! Finance.
While these aren't formal recommendations, their solid track record of raising dividends is reason enough for further research.
Ask not for whom the bell tolls
I'm not saying that younger investors shouldn't also hold riskier investments like small-cap and high-growth stocks, but to paraphrase Benjamin Franklin, an ounce of planning is worth a pound of retirement prosperity. And that means dividend stocks.
Building a portfolio of dividend-paying stocks early on is just one tenet of a successful retirement plan. For additional tips, consider a free 30-day trial to Motley Fool Rule Your Retirement where advisor Robert Brokamp helps investors approaching, nearing, or already in retirement develop plans to properly manage wealth.
A free trial includes model portfolios, the nitty-gritty on important asset classes, retirement calculators, and recommended investments -- and you can click here to get started. There's no obligation to subscribe.
This article was originally published on Sept. 2, 2008. It has been updated.
Todd Wenning hopes everyone had a wonderful Thanksgiving. Todd does not own shares of any companies mentioned. Johnson & Johnson, Sysco, and Eli Lilly are Income Investor recommendations. The Fool owns shares of Stryker. The Motley Fool has a disclosure policy.
© 2008 UCLICK, L.L.C.
Copyright © 2008 Universal Press Syndicate
