Are you 56 to 62 years old? If so, what I’m about to say will probably scare you.
According to the Employee Benefit Research Institute, nearly half (47.2%) of you in that age bracket will not have enough money in retirement to pay for basic expenditures and health care costs. That doesn’t mean vacations abroad or fancy cars; I’m talking groceries, house maintenance, and routine medical checkups.
The statistic is not meant to scare you, but it is indeed frightening. Nonetheless, I believe I have some pretty simple advice that can help you switch directions and put your retirement on the track to financial success.
What went wrong?
After saving up all your hard-earned cash and allocating properly, which probably meant having a good portion of money in the stock market, investors have had a dismal decade. The combination of the tech bubble in the early 2000s and the financial crisis in 2008 has meant zero or negative returns for many investors -- far below the stock market’s historical 9.7% return.
People who finally got back into the market late last year most likely got freaked out by the May flash crash, the European debt crisis, and the very real threat of a double-dip recession. In fact, during May, stock funds saw massive outflows as investors again raced to the sidelines.
With the first of the baby boomers getting ready to retire next year, my biggest fear is that people in the age bracket above will finally say: Enough is enough. I’ve had it with the stock market.
Because the truth of the matter is that investing in Treasury bonds, CDs, or other fixed income investments won’t help the 47% of you that need to make up for lost time. You virtually have to purchase individual stocks if you want a chance to retire comfortably.
I know the market is volatile and that so far, 2010 has not been a kind year. But I’ll explain what I believe is a safe and easy way to feel calm about getting back into the market.
The cream of the crop
Most investors love dividends; after all, you get paid to hold a stock, so it’s just like having the attributes of a bond, but there’s also the potential for capital appreciation.
Every year the S&P 500 comes out with what it calls the “Dividend Aristocrats.” Essentially, it’s the cream of the crop for dividend investors, and the requirements are more than stringent:
- Minimum market cap of $3 billion.
- Minimum average trading volume of $5 million to ensure liquidity.
- Company must have increased dividends every year for at least 25 years.
And the S&P holds a tight leash. If you’re on the list, it’s for good reason, and if you even slightly stray from the path, it’s sayonara to you!
In the past year, some pretty prestigious companies have gotten kicked out of the club. General Electric (NYSE: GE ) was removed from the list because instead of boosting its dividend, it cut it from $0.31 to $0.10 when the financial crisis hit. Although it still has a healthy yield of 2.7% and a solid payout ratio of 41%, GE has yet to push its dividend back up. Also removed from the list last year was US Bancorp (NYSE: USB ) , which cut its dividend by a whopping 88%. For virtually the same reasons, USB’s CEO stated the slash was necessary due to “uncertainty in the financial markets and a weakening economy.”
Fortunately, many companies were added to the list, so it is now comprised of 42 stocks. One of the safest ways to get back into the market would be to purchase aristocrats that have clearly illustrated they can pay cold, hard cash -- cash that isn’t going to evaporate any time soon. To help you, I’ve identified five stocks (all aristocrats) that are trading for P/E ratios of less than 15 and that have been increasing dividends for at least 30 years.
| Company |
Paying Dividends Since
|
Consecutive Dividend Increases
|
P/E Ratio
|
|
CenturyLink (NYSE: CTL )
|
1974
|
36 years
|
10.7
|
|
Eli Lilly & Co. (NYSE: LLY )
|
1885
|
42 years
|
9.1
|
|
Abbott Laboratories (NYSE: ABT )
|
1926
|
37 years
|
14.4
|
|
Archer Daniels Midland (NYSE: ADM )
|
1927
|
35 years
|
11.4
|
|
Becton, Dickinson & Co. (NYSE: BDX )
|
1926
|
37 years
|
12.8
|
Source: Yahoo Finance, DividendInvestor.com.
Listed are five very different companies, covering industries from communications to health care to agriculture. Although all are about as safe as you can get, some have higher risk/reward profiles. For instance, CenturyLink pays an outstanding 8.2% yield but has a 99% payout ratio, and its recent pursuit to purchase Qwest Communications indicates some uncertainty for the future.
On the other hand, Archer Daniels pays a more modest 2.2% dividend and has a reasonable payout ratio; it should also continue to benefit from ethanol subsidies and an increased demand for global food products. With a beta of 0.28, this is clearly not a very volatile stock.
A Foolish final thought
Retirement is going to come sooner than you know it, and if you’ve worked hard your whole life, you deserve a comfortable and stable retreat from the labor force more than anything. To do that, you have to believe that though it’s been a rough decade, history has illustrated the great potential of choosing stocks as investments. So, put aside your fear and take a serious look at the five companies listed above. I think they are a great place to start because of their value, income, and overall stability.
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