Retiring in the next 10 years?
Chances are, your portfolio probably isn't anywhere close to where it should be. Instead of pressing the panic button (like most folks), read ahead and I'll explain how you should take a few careful steps to get back on track.
The simple but unfortunate truth
In a recent Wells Fargo survey, respondents ages 50-59 said they had saved, on average, about $29,000. If you plan on retiring when you're 65, or even close to that age, $29,000 simply isn't going to cut it. With Social Security remaining stagnant and the target of proposed cuts, pensions all but gone, and medical costs rising, baby boomers near retirement age face some daunting obstacles.
Near-retirees frequently make one of two major mistakes. The first group figures that because they don't have enough money saved, they need to make up for lost time by pouring all their savings into equities in the hopes of finding outstanding gains to cover their shortfall. The second group fears losing any of the money they've worked so hard to make, and so instead of investing, they simply keep all of their money out of the market. In fact, a recent Fidelity study showed that 28% of participants (ages 55 and above) had either no money in stocks or 100% of their 401(k) balances in the stock market.
This is a pretty understandable response; folks have a tendency to either want to "risk it all" or to avoid further losses at all costs. Both tactics could be fatal for your portfolio.
What you shouldn't be doing
If you are close to retirement, you can't afford to have all of your money in the market -- just ask anyone who has dealt with the past decade of near-zero returns. However, this doesn't mean you should jump into the market head-first and start picking growth stocks that you hope will bring unusually high returns.
For instance, I own shares of First Solar (Nasdaq: FSLR ) , one of the largest providers of thin-film solar panels. As a leader in the industry with a great competitive advantage, this is a terrific stock for someone like myself who has plenty of years until retirement. However, subsidy cuts in Europe and uncertain regulation could mean that this stock needs years until it reaches its potential, so I wouldn't suggest it for a near-retiree. The same goes for a stock like Sirius XM (Nasdaq: SIRI ) -- a terrific turnaround story that has seen its share price rebound by more than 1,200% since early 2009. However, with continuing competition and a beta of 2.19, this stock is not for the faint of heart; near-retirees want to be able to sleep at night, not toss and turn worrying about fluctuating prices.
So what next?
As I've suggested in the past, folks with a portfolio shortfall should look toward dividend stocks to help them get back in the game. Allocate maybe 20% of your portfolio, enough to make a difference but not enough to scare you out of the market, to solid, dividend-paying stocks that have room for growth.
Dividend investing has gotten quite a bit of attention lately as investors turn to companies instead of savings accounts or Treasuries for some extra income. But you can't simply just look for the highest yields, as that can be a recipe for disaster.
As an example, look at both Frontier Communications (NYSE: FTR ) and Windstream (NYSE: WIN ) , companies that pay a more-than-generous 7% dividend. Although their dividends seem great, their payout ratios are dangerously high, which suggests they may have to cut their payouts in the future. Although things look better on a free cash flow basis, cash flow is subject to acquisition integration risks and customer churn. Growth for the two rural telecoms is expected to be minimal -- if not negative. What you want from a dividend stock is a great dividend, sustainability, and room for capital appreciation as well. These two companies don't seem to offer those three traits.
At the Fool, we often talk about the Dividend Aristocrats -- companies that the S&P tracks that have been able to increase their dividends for 25 consecutive years or more. These companies have shown that they can endure the booms and busts that are inevitable, and we've certainly experienced our fair share in the past 10 years. So I searched the list of 42 current aristocrats and screened them for high dividends, reasonable payout ratios, and five-year growth estimates at or above 10%. These are the three stellar dividend stocks that can help you get started investing again:
5-Year Growth Estimate
|Cincinnati Financial (Nasdaq: CINF )||5.0%||52%||10.0%|
|Leggett & Platt (NYSE: LEG )||4.7%||90%||15.6%|
|Abbot Labs (NYSE: ABT )||3.6%||55%||10.1%|
Source: Capital IQ, a division of Standard & Poor's.
Retire in style
It's important to drill down further into these companies to see if you're comfortable with each of them, but for the most part, they've all shown resilience and the ability to continue paying shareholders, even when times were tough -- and that's the sort of stock you want to own.
Just because you don't have enough money to retire today doesn't mean you can't retire comfortably in the next 10 or 15 years. Be smart about asset allocation; don't sit scared on the sidelines, but don't hastily decide to go "all in" to see if you can find the next Google or Microsoft.
Investing a small amount of your portfolio in dividend-paying stocks is a great way to start working on your retirement in 2011. You can learn more useful tips by clicking here to read our brand new special report, The 7 Secrets to Salvage Your Retirement Today.