Advances in medical care and disease prevention mean we're living longer than ever before. The news is so good that the BBC has even started to speculate as to whether there really is a hard-coded natural limit on how long we humans can live.
That's absolutely fabulous news, except for one small problem: The longer we live, the greater our chances of outliving our money. Plus, on a related note, the older we get, the harder it gets for us to earn a living -- especially in physically demanding jobs.
Longevity insurance?
The insurance industry has jumped all over people's understandable fears by essentially repackaging deferred annuities as "longevity insurance." With these plans, you hand over money to the insurance company now, and it promises you a monthly check once you hit a certain age, if you live that long.
It sounds wonderful in concept, but as with anything insurance-related, there are at least two important strings attached:
- You're on your own for inflation. The monthly amounts you receive from these plans sound very attractive in today's dollars. But should you live long enough to collect, your payment will likely feel much smaller a few decades in the future.
- If you die early, the insurance company keeps the money. The program sells insurance, not investments. You're pitting your genetics, lifestyle, and luck against the insurance company's army of actuaries. While you might live long enough to make out well, the insurance company wouldn't last for very long if it expected to lose money on the policies it wrote. If you buy one of these policies and die early, your heirs are out of luck unless you chose some type of payout option that provides for them.
The investor's alternative
Fortunately, there are ways to invest your money that both give you a fighting chance against long-term inflation and enable your heirs to benefit once you're gone. One approach is to buy the shares of companies that have both solid current dividend yields andlong-term records of routinely raising those dividends.
Yes -- a small handful of businesses hit both those criteria. A company called Mergent and its Indxis subsidiary keep a list of "Dividend Achievers" that have consistently paid and routinely raised their dividends for at least 10 consecutive years. The past 10 years have included a financial meltdown and an economy that some have described as the worst since the Great Depression, so companies that qualify for that list have certainly demonstrated their staying power.
Nevertheless, up until the start of the recent crisis, several more financial companies met the criteria to be on Mergent's list than do now. If nothing else, that's a strong reminder both that past performance is no guarantee of future results and that diversification is important.
Digging through the Dividend Achievers to find companies that have that rare combination of decent yields, dividend growth, and provided diversification across industries produced this list:
|
Company |
Industry |
Recent Yield |
Dividend Growth (YOY) |
|---|---|---|---|
| Abbott Laboratories (NYSE: ABT) | Drugs | 4.0% | 9.1% |
| Altria Group (NYSE: MO) | Tobacco | 6.0% | 8.6% |
| AT&T (NYSE: T) | Telecommunications | 6.1% | 2.4% |
| Diebold (NYSE: DBD) | Computers | 3.2% | 3.7% |
| Kinder Morgan Energy Partners (NYSE: KMP) | Oil well equipment & services (pipelines) | 6.2% | 7.6% |
| Leggett & Platt (NYSE: LEG) | Home furnishings | 4.6% | 3.8% |
| Sysco (NYSE: SYY) | Vending & food services | 3.7% | 4.0% |
| Average | Diversified portfolio of Dividend Achievers | 4.8% | 5.6% |
YOY = year-over-year.
The best of several worlds
With an average yield above 4%, these companies will let you withdraw the oft-cited 4% from your retirement portfolio for living expenses, without selling a single share. Also, the average year-over-year dividend growth rate, which is well above the official 2.1% inflation rate over the past 12 months, shows that those payments have a fighting chance to continue to at least keep pace with inflation.
Additionally, with a base of companies that have shown themselves capable of paying and raising their dividends even after this economic meltdown, it's easier to sleep at night. The cross-industry diversification helps in the sleep department, too, since it's unlikely that every industry will suffer in a future meltdown. In the event that a company does cut or fail to raise its dividend, it can always be replaced with another stock from Mergent's list.
Perhaps best of all, since these are investments rather than insurance, should you not manage to live forever, your heirs will inherit the wealth you leave behind, not some insurance company. Altogether, that's not a bad combination for a plan that's got a decent chance to take you through a retirement that just might last several decades -- or more.
