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How to Avoid a Portfolio Pay Cut

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Looking for something to give thanks for this year? How about three days in a row where the Dow actually rose?

The recent glimmer of hope in the stock market has given all of us a nice break from the gloomy outlook that has dominated our lives over the past few months. And although there's undoubtedly more work to do before we can put the financial crisis behind us for good, the calm in the storm can give you the chance to see where you stand -- and where you're headed.

What you're thinking now
The readers I've heard from are scared. They're upset at what the financial industry did to their life savings. They're angry at the greed within corporate boardrooms and executive suites. They're in shock at how much of their money is simply gone -- and far from certain that they'll ever get any of it back.

Of everyone I've talked to, the ones who are the most scared are those who've recently retired. Although working stiffs like me can just set our sights a little lower and plan to work a few years longer than we'd hoped, seniors have a lot fewer options to make up for a 25%-50% haircut in their retirement nest eggs.

Get out now?
Unfortunately, a lot of seniors have just about had it with stocks. They remember the stories their parents told them about the Great Depression and berate themselves for ever trusting their money to the stock market.

But despite the drop in your net worth, you may not be in as bad shape as your brokerage statements suggest. In particular, if you've used dividend stocks to invest, you may be surprised at where you stand -- and just how much flexibility you have to ride out the storm.

Dividends and your income
More than most investors, retirees depend on dividend income to pay ongoing expenses. So to a large extent, the most important number retirees track isn't their share value -- it's the amount of dividend income their portfolio generates over the course of a year.

With the stock market down so much, there aren't many stocks that have escaped significant losses. But the surprising thing is that many of those stocks have managed to raise their dividends over the course of the past year -- despite seeing their share prices fall. Here are just a few:

Stock

1-Year Return

Dividend Increase 2008 vs. 2007

Current Dividend Yield

Sysco (NYSE: SYY  )

(25.1%)

15.8%

3.9%

Coca-Cola (NYSE: KO  )

(25.1%)

11.8%

3.4%

Pfizer (NYSE: PFE  )

(23.8%)

10.3%

8%

Johnson & Johnson (NYSE: JNJ  )

(10.4%)

10.8%

3.1%

ConocoPhillips (NYSE: COP  )

(31.4%)

14.6%

3.8%

Boeing (NYSE: BA  )

(54.3%)

14.3%

3.9%

American Express (NYSE: AXP  )

(59.4%)

20%

3.4%

Sources: DividendInvestor.com, Yahoo! Finance. As of Nov. 25.

What do those rising dividends mean? For seniors, they mean that even though their portfolio values are falling, their annual income from their investments is actually going up. If you have more cash coming in from your stocks, it's easier to meet your living expenses without having to sell shares. And right now, selling shares is the last thing anyone wants to do.

Be conservative, but don't panic
Of course, although many more stocks than those listed above have raised their dividends over the past year, others have had to cut or eliminate their dividends entirely. On the whole, though, dividend yields on the S&P 500 are holding above the 3% level -- and were as high as 3.5% recently.

If the only reason you want to sell your stocks is that you're scared, don't do it. Dumping your shares at fire-sale prices will only make your fear last longer -- potentially the rest of your life.

If you need more income, though, consider moving more of your portfolio into dividend stocks. Not only will they give you the peace of mind that comes from getting a quarterly check from a company -- but they'll also make it easier for you to stand pat with a strong long-term portfolio.

To get the best results for your retirement:

Retired? Don't panic! Our Motley Fool Rule Your Retirement newsletter service will help you make it through the downturn, with tips on finding recession-proof investments, stretching your budget, and much more. Take a free look with a 30-day trial and see how Rule Your Retirement can calm your fears.

Fool contributor Dan Caplinger isn't close to retirement, but he still loves the dividend stocks in his portfolio. He doesn't own shares of the companies mentioned in this article. Sysco, Pfizer, and Johnson & Johnson are Motley Fool Income Investor picks. Pfizer, Coca-Cola, and American Express are Motley Fool Inside Value picks. The Fool owns shares of Pfizer and American Express. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy pays dividends.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

11/24/2014 3:14 PM
AXP $90.92 Up +0.53 +0.58%
American Express CAPS Rating: ****
BA $134.53 Up +1.75 +1.32%
The Boeing Company CAPS Rating: ****
COP $73.25 Down -0.39 -0.53%
ConocoPhillips CAPS Rating: *****
JNJ $106.80 Down -1.06 -0.98%
Johnson & Johnson CAPS Rating: ****
KO $44.34 Down -0.17 -0.37%
Coca-Cola CAPS Rating: ****
PFE $30.22 Down -0.23 -0.76%
Pfizer CAPS Rating: ****
SYY $39.48 Down -0.22 -0.55%
Sysco CAPS Rating: *****

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