The toughest problem for retirees in today’s financial markets is how to get a decent yield on your savings. Before 2005, you could put your money in the bank, draw 5 percent interest, and live off the proceeds. Not anymore.
Today a 5-year bank CD offers barely 1 percent. A 10-year Treasury bill from the U.S. government pays a paltry 1.5 percent. A corporate bond mutual fund might yield 3 to 4 percent, but leaves you helpless against any inflation.
Other investments can provide better paybacks. But there's always a trade-off. Master Limited Partnerships, for example, can cast off high yields, but they subject you to a complex tax situation. That’s not a problem if you have a lot of money and an accountant, but not a practical solution for the average investor.
So what about high-dividend stocks? This is not a new idea, and many of the shares have already been bid up by investors, perhaps capping future returns. But several areas of the market still offer inflation-beating dividends, with share prices that promise to increase at least as much as inflation:
Telephone. Verizon (VZ) and AT&T (T) ring up solid dividends: 4.6 percent for Verizon and 5 percent for AT&T. Both companies generate plenty of cash. But they are forced to make heavy investments to upgrade their networks, and that squeezes profits. The dividends are most likely safe, but not guaranteed. An alternative might be one of their Canadian counterparts. Bell Canada (BCE) now has a 5.2 percent yield and Telus Corp. (TU) has 4.1 percent. Is it too late? Probably not.
Utilities. Electric companies traditionally provide extra juice for retiree incomes. Duke Energy (DUK), Southern Company (SO), First Energy (FE), and American Electric Power (AEP) all deliver dividends over 4 percent. But many utility stocks are near their highs, suggesting a limit to additional capital gains. And when interest rates go up, these shares will inevitably go down. Buy them only if you think low interest rates are here to stay.
Health care. Johnson & Johnson (JNJ), Abbot Labs (ABT), Merck (MRK), and Pfizer (PFE) are longstanding medical providers 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 health care, these companies will remain hale and hearty.
Energy. Americans are well aware of the hazards of oil production, as the 2010 BP oil spill reminded us. But we need fuel to power our cars and heat our homes, and some of the big energy companies offer decent dividends. Chevron, the second-largest U.S. oil company, yields 3.6 percent. Conoco (COP) yields 4.9 percent. And if you're more venturesome, BP itself gushes out a 5 percent dividend. Energy companies also boost their appeal by providing a well-recognized hedge against inflation.
Consumer staples. We all go to the supermarket to buy shampoo, toothpaste, and cleaning supplies. Proctor & Gamble (PG) is a leader in the field and squeezes out a 3.8 percent dividend. Clorox (CLX), the bleach maker, pays 3.6 percent. While Warren Buffett's favorite stock, Coca Cola (KO), pours out a slightly-less-bubbly 2.7 percent, other products from Pepsi (PEP) to Kraft (KFT) to Heinz (HNZ) check out with better than 3 percent dividends. And McDonalds (MCD) serves up a fat 3.1 percent payout.
Individual stocks present many risks. So, for many of us, an ETF or mutual fund containing high-dividend stocks promises a more stable and diversified opportunity. For example, Vanguard offers ETFs that cover each of these five sectors, as well as a more general High Dividend Yield mutual fund (VHDYX). Most other major mutual fund companies have their own version of a high-dividend stock fund.
Dividend stocks offer more rewarding payouts than bank CDs or government bonds. They are not wild speculations like the newest Internet stock, but they do expose you to the risks of the economic world, which can be considerable. Nevertheless, high-paying stocks should form at least a part of any retiree's portfolio. How big a part depends on how steely your nerves are.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.