Shaken by an uncertain stock market, many young investors are spurning stocks for the perceived safety of bonds. But in trying to escape financial risk, they may be endangering their chances for a secure retirement.
According to 2009 numbers from the Investment Company Institute, only 22% of heads of households younger than 35 are willing to take on substantial investment risk. That's down from 30% in 2001.
Their caution's understandable, of course. During their formative years, these folks watched the stock market plunge roughly 40% in a single 12-month period, and they've endured further market ups and downs over the past few years. Despite our solid recovery from the Great Depression, a generation of people remained scarred by it; today's investors may be suffering from a similarly lingering sense of shock.
Why these investors are making a mistake
Still, shunning stocks isn't a good idea -- especially for the young. While the market can be volatile, it has also trended upward over the long term, enough to make up for occasional downturns. Given the dearth of other attractive options, it's ironically perilous not to invest in stocks, especially in your 20s or 30s. In attempting to avoid risk, these young people are unintentionally embracing it.
I blame our national financial illiteracy for this disconnect. Too few of us grow up learning much about money. A little more knowledge might help investors understand the importance of starting to save soon as possible, in order to take advantage of the miracle of compounding growth.
Not-so-risky stocks
Loading up on stocks can be much less risky than you think. This is a particularly great time to grab excellent dividend payers that will add to your income for decades to come. The following candidates are growing at a good clip, have reasonable valuations, and sport solid dividends:
|
Company |
(out of 5) |
5-Year Avg. Revenue Growth |
P/E Ratio |
|---|---|---|---|
|
Kraft Foods |
**** |
5.4% |
11 |
|
Walgreen (NYSE: WAG) |
**** |
9.6% |
14 |
|
Archer Daniels Midland (NYSE: ADM) |
**** |
15.6% |
11 |
|
Eli Lilly (NYSE: LLY) |
**** |
9.8% |
9 |
|
Medtronic |
**** |
8.4% |
10 |
Source: Motley Fool CAPS.
If their dividends grow by 8% per year, on average, they could provide serious income three decades down the line:
|
Company |
Dividend Yield |
Current Annual Income on $10,000 Investment |
Potential Annual Income in 30 Years |
|---|---|---|---|
|
Kraft Foods |
3.8% |
$380 |
$3,824 |
|
Walgreen |
2.5% |
$250 |
$2,516 |
|
Archer Daniels Midland |
1.9% |
$190 |
$1,920 |
|
Eli Lilly |
5.7% |
$570 |
$5,736 |
|
Medtronic |
2.7% |
$270 |
$2,717 |
|
Total |
$1,660 |
$16,713 |
Source: Motley Fool CAPS.
These are not high-flying, fast-changing companies prone to nerve-wracking volatility. They're big players in food, retailing, agriculture, pharmaceuticals, and medical devices -- all fairly stable and critical industries.
Companies like these could reward young people much more than any CD or bond. Let's hope more young investors realize this truth before it's too late.
Jim Royal may have found the dividend play of a lifetime.
