How To Increase Income When Investing For Retirement

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Includes: ABT, BMS, CLX, EMR, HCP, JNJ, KMB, LEG, NUE, PG, SYY, T
by: Avi Morris

The stock market has had a spectacular run off its lows in early 2009. Dow doubled to 13,000, and this has dramatically cut yields on most stocks. During this time, the Federal Reserve reduced interest rates, which is good for refinancing loans and mortgages, but tough on retirees, and to a lesser extent, those planning for retirement. High yielders, which generate income, are important in retirement accounts and for those planning for retirement. Retirees are living longer, and have a greater need for more income to pay for rising costs, which include increased medical costs and costs of care in later years.

Traditional investments for retirement accounts have emphasized investment grade bonds with a high degree of safety. But low interest rates from the Federal Reserve have forced investment thinking to change for retirement accounts. Treasury rates are at or near record lows, not far above zero. Investment grade bond yields are 2-5%. Today, IBM (NYSE:IBM) announced that it expects to borrow $1.5 billion worth of 3 year bonds, costing about 0.85% annually and 7 year debt at an annual cost of 1.9%. In addition, when bonds mature, principal is reinvested in new bonds, which could have even lower yields. IBM will use some of the proceeds to pay off debts with higher costs.

A better way to increase income in retirement accounts is invest in quality companies that raise dividends. Some of the finest Dividend Aristocrats were selected, which have been increasing annual dividends for at least the last 25 years. Many have streaks of 30-40 years (or more). After the difficult recession 3 years ago, dividend streaks have become more significant. These Dividend Aristocrats were hurt by the recession, but weathered the storm, and were able to extend their streaks, because of stronger financials at a time when many highly regard stocks (including former Dividend Aristocrats) did not raise dividends.

Below are 12 of the finest Dividend Aristocrats with high yields and growing dividends. Their yields and streaks of raising annual dividends are added to the stock prices:

Price

Yield

Streak (yrs)

ATT (NYSE:T)

$33.11

5.3%

28

Leggett-Platt (NYSE:LEG)

$21.77

5.1%

41

HCP (NYSE:HCP)

$40.77

4.9%

27

Kimberley-Clark (NYSE:KMB)

$78.74

3.8%

40

Nucor (NYSE:NUE)

$38.58

3.8%

39

Sysco (NYSE:SYY)

$28.70

3.8%

43

Clorox (NYSE:CLX)

$67.03

3.6%

35

Johnson & Johnson (NYSE:JNJ)

$65.34

3.5%

50

Procter & Gamble (NYSE:PG)

$64.51

3.5%

56

Abbott Labs (NYSE:ABT)

$63.05

3.2%

40

Emerson Electric (NYSE:EMR)

$49.36

3.2%

56

Bemis (NYSE:BMS)

$32.19

3.1%

29

Click to enlarge

Stocks with higher yields have a small degree of added risk. But with long track records of dividend increases, the added risk can be accepted. Some companies do not make final products (especially for consumers), and, as a result, are not well known by many investors. Leggett-Platt (LEG), HCP (HCP) (an REIT), Nucor (NUE), Sysco (SYY), Bemis (BMS) and Emerson Electric (EMR) do not have familiar names, but they have long streaks of raising dividends. The lack of familiarity brings more attractive valuations for these stocks.

While the stock market has extended its winning ways in 2012, most of these stocks have been trading sideways, offering relative bargains for income-oriented investors. The best performers are AT&T (T) and Kimberely-Clark (KMB), which have risen because of their attractive yields. Abbott Labs (ABT) has been bid up because it is splitting into 2 companies with the hopes of creating more wealth for its stockholders.

NUE, a steel company, is a laggard with an interesting story. Earnings suffered during the recession, but it is bouncing back, and analysts predict a major increase in EPS for 2013. The company has paid 156 consecutive quarterly dividends and increased the dividend every year since it began paying dividends in 1973.

The highest yielding stocks receive additional attention by income oriented investors. AT&T is well known for high yield over capital appreciation. LEG and HCP also offer yields near 5%. Because of their modest size, their stocks get less attention, which provides opportunity for value investors. LEG is an old line company that makes components for seats, and HCP is an REIT that invests in healthcare and related properties.

Successful retirement investing should raise income, which retirees need after capital appreciation has been limited. In the last 10 years, the Dow is up 32% (and that's off a depressed base). A track record of growing dividends will bring higher income. Only 51 S&P 500 companies and a handful of other companies qualify as Dividend Aristocrats out of a universe of nearly 20,000 companies. In this elite group, none are expected to be dropped because of an inability to raise annual dividends over the immediate future. Younger investors looking to grow investment worth (along with income) and seniors who are more concerned with raising current income should find investing in these Dividend Aristocrats a good way to increase retirement income.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.