The rules for smart retirement investing have gone through major changes in recent years. Investors have become used to investing in stocks because they delivered growth and higher dividends over the long term. But capital appreciation has been disappointing in recent times. The Dow began 2000 at 11,497. In almost 14 years it has grown 29%, equivalent to a compound annual growth rate of 2%. By another measure, from the record high in October 2007, the Dow has risen a measly 4.7%. Stocks of many famous companies have done worse. Additionally, stock markets have become more volatile with 2 substantial declines since 2000.
However dividends have provided almost 40% of increased wealth over the long term and now they are expected to provide a greater share of investment gains. During the low yield environment last year, high yielding stocks were bid up which reduced their yields. Since early May, income securities have sold off on expectations that the Federal Reserve will taper or end its bond buying program shortly. Changes are coming soon and investors are guessing when and how much will be done. The yield on the 10 year Treasury bond is the principal interest rate from which others are derived. Its yield has already shot up 118 basis points from the 1.6% low in early May. Rates on Treasuries, munis, junk bonds and higher yielding stocks have gone up.
Higher yields need to be appreciated when investing for retirement because they raise earnings needed to enjoy retirement. The best companies for that income are Dividend Aristocrats, with track records of raising annual dividends for a minimum of the last 25 years. Less than 1% of all stocks qualify for rewarding stockholders with higher payments during the best and worst of times.
Below are 20 of the finest in this group. They provide attractive yields and growing dividends for retirees and future retirees. In addition to price, yield and current dividend - the dividend in 2007 (prior to the recession) and the dividend streak measured in years are shown:
Leggett & Platt (LEG)
Procter & Gamble (PG)
Johnson & Johnson (JNJ)
Exxon Mobil (XOM)
Genuine Parts (GPC)
Emerson Electric (EMR)
Illinois Tool Works (ITW)
VF Corporation (VFC)
WW Grainger (GWW)
The recent sell off in yield stocks has brought increased yields for quality stocks. Now there are 9 with minimum yields of 3%. The rest may be more appropriate for retirement accounts with longer time horizons. My 3 favorite companies include the 2 with the highest yields and a new member of the group: HCP, LEG and CVX.
HCP has a shorter streak than most of the others, but that is still impressive, especially for an REIT. Many of the largest REITs cut dividends during the last recession. HCP invests in real estate serving the healthcare industry. In 2012, 85% of $2 billion invested was in senior housing and this is a growing business. Centers for Medicare and Medicaid Services projects national health expenditures to grow 3.8% in 2013 and 7.4% in 2014.
The company projects that FFO applicable to common shares (FAD) for 2013 of $2.46 - $2.52, a 12% increase over 2012. The dividend this year was increased a dime and next year's increase could at least match that. In taxable accounts, 73% was taxable last year.
Leggett & Platt
LEG has had an excellent long term record of growth. While the last recession hurt the company, it continued with 4 cent annual dividend increases along with treasury stock purchases. The 4 business groups are: Residential Furnishings (bedding components, home furniture and home furniture; Specialty Wire Products (fabricated wire products and aerospace products); Commercial Fixturing and Components (store fixtures), point of purchase products and office components; and Specialized Products (bedding manufacturing machinery, commercial vehicle products, and automotive seating/lumbar systems).
The company's primary financial goal is to rank in the top third of the S&P 500 for Total Shareholder Return (TSR), as measured over rolling 3-year periods. It has been achieving that goal since 2007. Analysts are forecasting EPS of $1.56 in 2013 and $1.76 next year. Such earnings could bring larger dividend increases.
CVX descends from the Standard Oil Company founded by John D Rockefeller nearly 150 years ago. Today it is one of the largest energy companies on earth. Last year it had revenue of $230 billion and net income of $26 billion. CVX just reached its 25th consecutive year of higher annual dividends and since 2003. The dividend has grown at a compound annual rate of 11%. In Q2, the annual dividend was raised from $3.60 to $4. EPS this year and next are projected at roughly $12, a little below $13 in each of the last 2 years. More dividend increases around 11% are coming.
While CVX is having a "tough" year, that's relative. Q2 earnings fell to "only" $5.4 billion from a very strong level last year. The decrease was largely due to softer market conditions for crude oil and refined products along with increased repair and maintenance work at US refineries. In Q2, it purchased $1.25 billion of treasury shares. Very few companies buy that much treasury stock in a year. Longer term, CVX projects over the next decade production will grow 4-5% annually, led by Malo and Big Foot projects in the Gulf of Mexico and the Gorgon and Wheatstone projects in Australia.
These stocks have done well for more than a year largely because of the search for higher yields with growing dividends. Unsatisfactory capital appreciation promotes the value of predictable dividends in retirement accounts where the main goal for the vast majority is to have a growing stream of income so that retirement can be enjoyed. In addition, rising income is needed to pay for what can become substantial costs in the later years of life. In simple terms, money has to last longer.
Shimon Peres, the President of Israel, just celebrated his 90th birthday. He doesn't have to worry about saving for retirement. But just about everybody else needs to prepare for rising expenses during retirement. These stocks have a variety of yields for different investors. After continuing to raise dividends during very difficult economic times, their dividends can be relied to deliver results. Best of all, the income can be counted on for growth.