The Federal Reserve's policy of low interest rates is making it harder when investing for retirement. Investors want dependable income to pay for retirement expenses over a longer life. But expenses can skyrocket in the latter years when extra care may be needed. Years ago, it was not difficult to earn 5% on investment grade bonds. That income was more valuable because of the safety quality associated with bonds. Several quality stocks had yields of 4-5% (and more) with expectations of rising dividends. Those days are gone, at least for the time being.
Retirement investing has different meanings for different investors. Some expect to retire in 10-20 years, or even longer. Others are close to the start of retirement and older people have already retired. My father once said that when he was a boy, he thought 65 was an old age. Now it is generally thought of as the start of retirement, and, with improved medical care, it is common for retirees to live another 20-30 years. Retirees and future retirees share a common interest in earning income that is growing to fund increasing expenses over a long period. Investment objectives are not that different, money has to last longer and grow.
Bank deposits earn virtually zero and bonds offer record low yields. High yield (junk bonds) debt has record low yields of 8% or less. It is still possible to obtain yields over 5% on REITs & MLPs, but some investors prefer traditional investing with stocks. Higher yielding Dividend Aristocrats (with track records of increasing dividends for at least 25 consecutive years) provide attractive yields and expectations of growing income streams over time. Below are 12 Dividend Aristocrats with generous yields above 2.7%. Their yearly streaks of raising annual dividends are shown in the right column.
Leggett Platt (LEG)
Air Products (APD)
Johnson & Johnson (JNJ)
Procter & Gamble (PG)
Clorox Company (CLX)
Emerson Electric (EMR)
Exxon Mobil (XOM)
Genuine Parts (GPC)
These companies have unusually long streaks of increasing dividends. During that time there were recessions when lesser companies ended their streaks (some even cut dividends). The recession in 2008 was especially hard on Dividend Aristocrats with about 20 ending their long steaks, including companies that have well known names.
They reward investors with growing income. LEG has increased annual dividends by only 4¢ since 2007. After a big jump in the dividend in late 2007, the company was hit hard by the recession in 2009. The other companies have been raising annual dividends by 5% or more. In the last 10 years, their stocks have performed well. The Dow Jones Industrials gained 73% (although some of the rise was attributable to starting from a low base after reaching an interim low in late 2002). The weakest Dividend Aristocrats were LEG and JNJ, up 50%, and the gain by PG matched the Dow. Stocks for the rest have at least doubled. Growing dividends come from growing earnings, which generate higher stock prices.
Aside from the depression in the 1930s, the Dow has an impressive record of growth for the 20th century. In the last 20 years, there has been a substantial change in the performance of stocks that is not widely appreciated. Dow finished 1994 at 3834 and then soared to 10,497 at the end of 1999. The compound annual growth rate was almost 25%. Since then Dow is up a meager 31% (with violent plunges), equivalent to a compound annual growth rate of 2%. During the early part of this century there have been a number of high profile companies with large sell-offs from which their stocks may never fully recover. But these companies are big and diversified around the world, positioned for future growth. Six have market caps over $100 billion: JNJ, PG, MCD, XOM, PEP and KO. All have a history of delivering rewards for investors through higher dividends, a key ingredient for successful retirement investing
Defensive investment for funding retirement is important after the Dow and S&P 500 have risen to record levels. Politicos in DC have already given Americans higher taxes along with federal budget cutbacks. Lower but massive budget deficits are not going away any time soon. Retirement expenses, including medical insurance, are rising, a trend that will continue. Stockholders of these companies know or will find out how good it feels to receive dividends, especially when they rise, before and during retirement. Higher dividends will bring capital appreciation.