5 Stocks for Retirees to Get Rich

Bill Gross is a bond fanatic.

He co-founded Pacific Investment Management Company (PIMCO) and is the chief investment officer of PIMCO Total Return, the largest mutual fund in the world. With $234 billion of assets under management and a history of totally outperforming his peers, it is safe to say that, yes, Bill Gross is a true bond junky.

That's why I did a double take when I read in this weeks' Economist that Gross said bond returns "stand at the threshold of mediocrity."

What is he talking about?
The stock market has been flat the entire year (without July's rally, we'd probably be pretty deep in the red). On the contrary, investment-grade corporate bonds are up almost 8%, while risk-free treasuries are up 6%. As the poster-boy for all things bonds, what the heck is he talking about?!

The truth is that interest rates have almost nowhere to go but up. And as yields increase, bond prices move lower, eating away at any gain from the coupon. Over the past 30 years, interest rates have mostly been on the decline, which has helped their general outperformance with regard to stocks.

But those days are most likely over. Considering our nation's vast indebtedness and new concerns about inflation, rates will literally have to creep up over time. How long it takes is anyone's guess, but Gross has said: "It's been a great thrill as rates descended, but now we face an extended climb."

How to reposition yourself
Everyone knows asset allocation is a crucial part of financial planning. Typically, we allocate a portion of our savings to stocks and a portion to bonds and cash, and then we call it quits. The problem is that now we can't expect those spectacular bond returns, and we can't count on them for unlimited yield. That doesn't mean we should stop investing in bonds, but it does mean we should change the way we look at individual stocks.

If you're a retiree or close to retirement, you probably have two main concerns: saving enough money to last your lifetime and having enough current cash to pay for your daily expenses.

This is where dividend stocks come into play. Similar to bonds, dividend stocks dish out a quarterly or annual payment, however, they also have unlimited potential for capital appreciation. Dividend stocks satisfy both of your main concerns by paying you cash up front to help with rent, groceries, and other expenses, but they can also increase their value over time, helping to raise your portfolio in the process.

However, not all dividend stocks are treated equally. If you're an investor that wants to sleep easy at night and not worry about the roller coaster that is the stock market, you should look for low-beta stocks. For instance, the real estate investment trust (REIT) NorthStar Realty Finance (NYSE: NRF  ) pays a great dividend of 11.4%, but its beta is close to 2. Similarly, commercial leasing aircraft company Aircastle (NYSE: AYR  ) pays a nice 4.2% yield but also has a beta of 2.5.

While there is nothing wrong with either of these companies, I wouldn't recommend them to older investors as they could churn up and down with the wild tide of the market. If stability is what you're looking for, then you've got to look elsewhere.

The best place to start
Let's say you want to take a portion of your stock portfolio and buy five individual stocks. I would suggest looking for companies that have low betas, pay great dividends, and still have room for growth. In addition, finding companies that you are comfortable with -- typically companies that have illustrated steadiness in the market -- is crucial to being at ease with your selections. The five companies I have chosen below are a great place to begin:

Company

Dividend Yield

1-Year Beta

Estimated EPS Growth*

Windstream Corporation (NYSE: WIN  )

8.6%

0.8

7.5%

Kinder Morgan Energy (NYSE: KMP  )

6.4%

0.6

21.7%

AT&T (NYSE: T  )

6.3%

0.4

7.3%

Altria Group (NYSE: MO  )

6.3%

0.5

6.9%

Bristol-Myers Squibb (NYSE: BMY  )

5%

0.5

12.3%

Source: Capital IQ, a division of Standard & Poor's. *2-year estimate.

These may not seem like the five most exciting companies, but that's the point. Sometimes the most unexciting, unexpecting companies are the ones that are less volatile but still have the ability to put cash in your pocket, in addition to growing over time. Not convinced yet? Take a look at what some simple investments would have done for you over the past five years:

Company

Initial Investment

5-Year Annualized Gain*

Ending Investment

Windstream

$1,000

5.8%

$1,325

Kinder Morgan Energy

$1,000

12.5%

$1,802

AT&T

$1,000

6.9%

$1,396

Altria

$1,000

13.2%

$1,858

Bristol-Myers Squibb

$1,000

5.6%

$1,313

*Compound annual growth rate

Over a very short time horizon of five years, you could have made more than a 50% gain by investing in these very ordinary-seeming stocks. Their success can be attributed to the fact that they held up well during the recession and continued to pay dividends, which ultimately played a big part in their gains. And this is during a time when the overall stock market was basically flat -- in fact, if you had invested $1,000 in a stock index fund, you most likely would have lost money!

Don't wait any longer
Despite last year's phenomenal rally in the market, investors this year have pulled billions of dollars out of stock funds and poured that hard-earned cash into bond funds. Considering the uncertainty in the market and in our economic future, it's an understandable response.

But trust me: Investing in individual stocks is the only way you can secure a path to a comfortable retirement. You may not get rich overnight, but allocating a good portion of your portfolio to dividend stocks will not only increase your wealth, but you'll sleep well knowing that your money is in good hands.

Jordan DiPietro owns no shares mentioned above. The Fool owns shares of Altria Group. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (21) | Recommend This Article (214)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 05, 2010, at 2:08 PM, gkoeninger wrote:

    You have me scratching my head regarding your suggestion of WIN as a way to gain wealth. I checked and their payout is 137% and their debt of 6.34 billion is serviced by a free cash flow of 0.67 billion which would suggest a 10 year ratio. Their income growth is a minus 16%. With 4+ million shares at $1.00 per share, I would guess they are borrowing to pay dividends. I know I am missing something. Perhaps you could guide me in your reasoning for selecting this company.

  • Report this Comment On August 05, 2010, at 2:30 PM, TMFPhillyDot wrote:

    @TxSailor,

    Very good point. The company's long-term debt is substantial, but over the next three years, there is only about $210M due; at the same time, the company typically generates about $700M-800M in FCF, which is more than enough to pay dividends, capex, etc. Starting in 2015, the debt payments will increase significantly, but with cash on hand, lending facilities, and FCF, the company doesn't anticipate having to cut its dividend. However, you are definitely on the ball as the payout ratio is something to look out for, and typically will make you do a lot more due diligence than you anticipated!

    Thanks for the comment!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 05, 2010, at 4:38 PM, delcash wrote:

    What's your take on Annaly Capital Managment (NLY) as a dividend stock investment?

  • Report this Comment On August 05, 2010, at 5:01 PM, TMFPhillyDot wrote:

    @delcash,

    See this article recently written:

    http://www.fool.com/investing/dividends-income/2010/08/03/th...

    Also this one:

    http://www.fool.com/investing/dividends-income/2010/07/16/bu...

    thanks for your question!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 05, 2010, at 5:50 PM, ricgre wrote:

    long term investors should consider kmr rather than kmp from a tax point of view.

  • Report this Comment On August 05, 2010, at 6:35 PM, TMFPhillyDot wrote:

    @ricqre,

    Are you referring to the fact that the tax on dividends may go up, so you'd rather own KMR as opposed to KMP? If so, what do you think the capital appreciation potential is for KMR? If you're not talking about the dividend tax, please elaborate!

    Thanks for the comment!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 05, 2010, at 11:50 PM, 1caflash wrote:

    Jordan, Thank You for helping us. I found a terrific California financial advisor who purchased WIN and is keeping me in it. Let's have some fun! Linking Intelligence Strategy Talent Smarts. [LISTS]. A Secret Stock Game. Clues are given randomly in Motley Fool discussions. Examples: KO is another fine investment. Young and Old enjoy its products. You can't drink it, but TOT is also in my portfolios. What is the Secret Stock? Hint: It is None of the aforementioned companies. The WIN-ner receives a full-year subscription to Motley Fool! I am disqualified if you decide to do this. More clues later.

  • Report this Comment On August 06, 2010, at 8:26 AM, camf100 wrote:

    After reading this article, I read the article on the table to the right "These dividends are done" where another Fool writer calls Bristol Myers and Altria "suspicious". This leaves novice investors like me scratching their head when deciding how to proceed if the same house is contradicting themselves. Sounds more like the medical industry. Can you please elaborate more after reading above mentioned article, I am close to retirement and need solid advice.

  • Report this Comment On August 06, 2010, at 9:00 AM, TMFPhillyDot wrote:

    @camf100,

    The first thing you need to know is that the Motley Fool has may different writers with varying opinions, and we champion diversity of thought. So often times, you may find two different articles on the same stock -- one bullish and one bearish. As an investor, this is a great thing -- you should always be looking at two sides of the same coin.

    In terms of helping out, I'd be happy to. What exactly are your specific questions?

    Thanks for your comment, and congrats on becoming a new, or novice, investor! Keep it up!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 06, 2010, at 10:02 AM, brassbear wrote:

    Jordan-- Would you explain what you mean by "*compound annual growth rate"? On what I think is a related note, if I wanteadditional dividend cash flow to grow, would I not be better off investing in a "share builder" type account and automatically reinvest my dividends into additional shares of stock, assuming I can pay the income tax on the reinvested dividends? Thanks

  • Report this Comment On August 06, 2010, at 10:58 AM, TMFPhillyDot wrote:

    @brassbear,

    Compound Annual Growth Rate (CAGR) is the year-over-year growth for a determined period of time. It's not an actual growth rate -- really it is what a company would have returned had it grown at a steady pace over, in this example, a 5-year time frame.

    To answer you second question, every situation is different depending on what type of account you have (brokerage, IRA, Roth, etc.), what tax bracket you fall into, etc. However, if you don't need the immediate income, reinvesting dividends is always an excellent way to grow your wealth.

    Hope that helps, and thanks for reading!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 06, 2010, at 10:29 PM, rookie2009 wrote:

    MLPS' are a bit high at the moment, or shall I say popular. just another monkeywrench to throw at any idea. I own 2 of the above and am retired. Thanks for stroking my battered investment ego.

  • Report this Comment On August 07, 2010, at 11:23 AM, tomd728 wrote:

    In '09 my bond portfolio increased my value 40 % .To date, this year, I am up over 12 %.

    With the mix I hold of high yield common,Bonds,

    MLPs, I sleep well,do not have to tinker the mix,

    and except for the louts who gave us "Fat Finger Day" it has been smooth sailing.

    The crew at Pimco are some of the smartest guys in the room but like all others who market the agenda is slanted.

    Respectfully,

    Tom

  • Report this Comment On August 07, 2010, at 11:37 PM, judithjo wrote:

    I bought KMP at $43.75 and $50.25 in late 'o8. Would you really suggest that I buy more at today's price? Does KMP really have room to grow? (I agree with TxSailor's comment about WIN. That cash payout is very high, although it doesn't necessarily mean they are borrowing to pay their div.) Would appreciate comments about KMP's growth prospects.

  • Report this Comment On August 08, 2010, at 11:21 AM, TMFPhillyDot wrote:

    @judithjo,

    I think for investors that are just getting started and that are looking at income as an important part of their portfolio, KMP is a great purchase. However, as you said, it is certainly at a lofty price.

    If you already own it -- and bought at lower prices -- then check out this article I wrote about KMP a month ago: http://www.fool.com/investing/dividends-income/2010/07/15/bu...

    Thanks for the comment!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 13, 2010, at 11:57 AM, steveelcpo wrote:

    Further to camf100's comments on 6 Aug, specifically referring to BMY;

    Based on my prior experience, drug stocks are only as good as their pipeline and current patents. If they have a good # of drugs in the research/approval pipeline, and have no major revenue providers coming off patent within the next couple of years, then dividend is relatively secure. If either of those elements is questionable, then dividend security may be in question. Also, factor in the uncertainty of Obamacare and whatever affect that may have on cash flow (most likely negative), and pharma stocks seem like not the best possibility for investment. Is Pfizer a better deal at about $16/share with a 4.5% yield? Case in point, PFE cut their dividend about 2 yrs ago.

  • Report this Comment On August 13, 2010, at 12:51 PM, TMFMMTInvestor wrote:

    Jordan,

    Enjoyed the article, but feel it necessary to point out to readers that beta is only a measure of volatility. While a lower beta may help you sleep at night if you can't stomach big price swings, investors should know that it doesn't make an investment less risky per se. Rather, using traditional valuation metrics and a DCF model to estimate intrinsic value can help one purchase a stock at an attractive price. This makes an investment (relatively) less risky/"safer," albeit not risk-free. You probably already agree with this point, but I just thought it was an important missing component to your piece, which I otherwise thoroughly liked.

    Best,s

    Scott

  • Report this Comment On August 13, 2010, at 1:31 PM, TMFPhillyDot wrote:

    @sjf2005,

    You are right -- I absolutely agree with your comments and think it's a great addition to the piece. Thanks so much for the comment!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 13, 2010, at 2:43 PM, RHinCT wrote:

    The title says "for Retirees to Get Rich". Retirees are people who are ALREADY retired. You really think you have a way for them to get rich? Hey, then lets ALL retire so we can ALL get rich.

  • Report this Comment On August 13, 2010, at 4:26 PM, bricks79 wrote:

    KMP is a little pricey, BMY is a buy to $26. MO has run way up and needs to pull back before buying. Intermediate corporate and tax exempt bonds are ok for another year as the Fed will not increase interest rates anytime soon. I am retired and long all the above. Yes, the article is mistitled.

  • Report this Comment On August 14, 2010, at 4:10 PM, philkek wrote:

    "5 Stocks for Retirees to Get Rich" is a good title. A dream come true for many fools in a few years ? Better Business Bureau says better to investigate BEFORE we invest. Reading this article and fellow fool comments are a beginning to my personal investigation BEFORE I invest. Educational and entertaining read. Many fools already know the fundamental details of investing. I'm still learning details in this business. Of symbols named here I have bought MO for the 4 star dividend to reinvest. Fool on for profits.

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