In the good old days, investing was easy. Just dump your money into an index fund, earn those 10% annual returns, and retire rich.
Then the Lost Decade came around and ruined everything. With their faith in the stock market shattered, and alternatives paying next to nothing these days, many investors think that there's no reasonable way they'll be able to retire at all -- let alone securely and comfortably.
A Gross future
When it comes to pessimistic predictions, Pimco's Bill Gross certainly isn't the ultimate doomsayer. Unlike those calling for a cataclysmic financial meltdown and the death of the stock market, Gross merely believes that financial markets are adapting to what he calls the "New Normal" -- an environment in which growth and investment returns are lower than they've been in the past.
In particular, Gross considers past return assumptions for both stocks and bonds too high for the current sluggish economy. Whereas long-term average returns for stocks have ranged around 8% to 10%, Gross believes that annual returns closer to 5% are in the cards for the foreseeable future. And although bond investors have gotten used to both healthy interest payments and capital gains in the decades-long bond bull market, today's current low interest rates lead Gross to predict around a 4% return for bonds going forward.
If they come to pass, those lower returns have huge implications for savers. Over 30 years, a 10% return turns $1,000 into around $17,400. But if you only earn 5% on your money, then you'll only have $4,300 by 2040 -- less than a quarter of what you may have expected. Put another way, in order to reach the same goals with a 5% return, you'd have to save four times as much as you thought.
Even with the recession officially over, most people aren't in a position to quadruple their savings. So if you think things are going to get as bad as Gross believes, what are you supposed to do about your retirement?
Finding growth
One way to beat the odds is to look beyond merely matching the market. A core of index-tracking mutual funds or exchange-traded funds works well if the market's average return is enough for you to reach your financial goals, but if you need more, then you have to take on the risk of investing in individual stocks or sectors.
One promising area lies in traditional growth stocks. You can often find good candidates just by analyzing an industry and comparing competitors. For instance, it's been clear for a while that Blockbuster was losing the race with Netflix (Nasdaq: NFLX) for the home-video market. Yet shareholders have still seen Netflix shares more than triple in the past 12 months alone, while Blockbuster filed for bankruptcy earlier this month.
Also, innovation at companies often gets rewarded with higher share prices. Green Mountain Coffee Roasters (Nasdaq: GMCR) has seen that with its cost-conscious Keurig home-brewing machines, while OpenTable (Nasdaq: OPEN) has revolutionized the way tech-savvy consumers make restaurant reservations.
Growth of another sort
High-growth stocks, however, make a lot of investors nervous because of their volatility. A more conservative alternative for investors, though, is to look for dividend-paying stocks that have achieved high payout growth rates. For instance, Western Union (NYSE: WU) and Broadridge Financial (NYSE: BR) have both seen greater than eight-fold growth in their dividends just since 2007, and while their dividend yields aren't stellar, their low payout ratios mean that they have room for further increases in the future.
If you want healthier current payouts, Chevron (NYSE: CVX) and Paychex (Nasdaq: PAYX) both pay 3% or more in dividends now. And while mere double-digit annual dividend growth may pale in comparison with Western Union or Broadridge Financial, you can definitely argue that 10% to 20% annual dividend increases should justify at least 10% annual stock price appreciation over the long haul -- a target that puts the New Normal to shame.
Keep investing
Don't let naysayers like Bill Gross convince you that there's no way you'll be able to retire comfortably. Even if the New Normal does reduce long-term returns on major market indexes, going the extra mile to find the best investments will go a long way toward closing the gap and helping you reach your retirement goals.
Want more dividend stock ideas? Matt Koppenheffer has found 10 stocks with blazing fast dividend growth.
Fool contributor Dan Caplinger prefers the paranormal to the abnormal. He doesn't own shares of the companies mentioned in this article. Paychex and Western Union are Motley Fool Inside Value recommendations. Green Mountain Coffee Roasters and OpenTable are Motley Fool Rule Breakers picks. Netflix and Western Union are Motley Fool Stock Advisor selections. Chevron is a current Motley Fool Income Investor choice, while Paychex is a former one. The Fool owns shares of and has written puts on Broadridge Financial. Motley Fool Options has recommended writing a covered strangle position on Western Union. The Fool's disclosure policy stands head and shoulders above the normal.
