High interest rates generating more income have become more important for retirement investing because retirees are living longer. Expenses are generally much higher in later years, when medical and costs of care can soar. The low interest rate policy from the Federal Reserve makes retirement investing more difficult and these low rates will continue through at least the end of 2014.
Years ago, investing for retirement meant selling stocks and other aggressive investments to be reinvested in so called safe investments-- generally bonds with only moderate yields. While investment grade bonds are considered safe, interest rates (around 2-5%) are flat over the life of a bond, and bonds do not appreciate. Additionally, when bonds mature there could be a loss of income when the proceeds are reinvested in bonds with lower coupons (as is the case today).
Dividends with high yields, especially growing dividends, have a greater importance for retirement investing. Selecting stocks for income requires careful selection. Capital gains have not given large rewards, as in the past. Many stocks have been limited in appreciation since 2000. Dow stocks with lackluster results in the last 10 years include Microsoft (MSFT) and Cisco (CSCO) with limited growth, while General Electric (GE) and Pfizer (PFE) are lower. However, Dividend Aristocrats-- with records of raising dividends over at least the last 25 years-- bring more reliable long term results. Below are 12 of the highest yielding stocks.
12 High Yielding Dividend Aristocrats for Retirement Accounts
HCP, Inc (HCP)
Leggett & Platt (LEG)
Sysco Corp. (SYY)
Johnson & Johnson (JNJ)
Clorox Company (CLX)
Abbott Labs (ABT)
Bemis Company. (BMS)
Emerson Electric (EMR)
Procter & Gamble (PG)
Most have been raising annual dividends for 30-40 years. JNJ, EMR and EMR have streaks of at least 50 years. All are S&P 500 companies, except for RPM (because of its size). The table shows the companies, dividends and yields along with dividend growth since 2007, and growth has been excellent.
One adjustment for growth was made for LEG. In Q4 2007, the dividend was jumped to an annual rate of $1.00. Then the recession hit full force and subsequent annual increases have been only 4¢. Until earnings grow more rapidly, 4¢ increases should be expected going forward, so I used a 20% growth number which represents a fairer number for comparison.
In taxable accounts, dividends are treated as qualified dividends (i.e. lower tax rates) except for HCP, which is an REIT. REIT dividends don't receive that favorable tax treatment but generally some of the dividend is tax free or taxed at lower rates such as capital gains. Last year, 48% of the HCP dividend was considered ordinary income and almost 13% was capital gain.
With yields of 3-4% and assuming dividends are reinvested, in 20 years the number of shares in an investment will roughly double. Increased dividends year after year should bring substantially higher earnings and higher stock prices. Consistent dividend growth is important for impressive capital gains and rising income in retirement years. In the last 4 years, many Dividend Aristocrats have been dropped because they failed to raise the annual dividends, making the remaining ones and new members even more impressive.
The low interest rate policy of the Federal Reserve has made this a very challenging time for retirement accounts looking for higher income. Higher dividends over time have a dual benefit. They raise income-- which is critical in retirement accounts-- and higher dividends come from higher earnings, which should increase stock prices. High yields from quality companies are available for retirement accounts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.