Growing Dividend Income Has Become More Important For Successful Retirement Accounts

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Includes: ABT, APD, BMS, CLX, EMR, JNJ, KMB, MCD, PG, RPM, SYY, WBA
by: Avi Morris

Recent studies found there has been a significant loss of wealth by many Americans. Two weeks ago, a Federal Reserve study showed that net worth of the median American family fell 39% between 2007 and 2010. This data is especially important for retirement accounts, money that is part of family wealth. The purpose for retirement money is to pay for expenses so retirees can enjoy retirement years. In later years, additional funds are typically needed for increased medical and healthcare expenses.

Retirement accounts have been seriously tested since the financial meltdown in 2007-2009. The Dow 30 plunged 54% in only 17 months from its highs in October 2007, one of its worst losses in history. Then markets roared back and Dow more than doubled in 3 years. But in 2012 the markets have flattened. Risk associated with large swings in the stock market have increased substantially which can be especially hard on retirement accounts. That raises the obvious question, "Am I better off?" Many retirement accounts are not. Capital appreciation has provided a majority of increased wealth in the past. Now it can no longer be taken for granted.

The other source of growth is dividends. Dividends were paid during market swings, including the extraordinary selloff. The recession caused dividend reductions including from some Dividend Aristocrats (companies which had raised annual dividends for a minimum of the last 25 years). The stronger companies, along with new Dividend Aristocrats, persevered and kept raising annual dividends. These companies continued to deliver rewards in retirement accounts independent of market fluctuations so that investment income increased.

To earn dividend growth in retirement accounts, 12 of the best Dividend Aristocrats with yields of 3-4% were selected. Companies with higher yields carry a small degree of business risk concerning the ability to continue raising dividends. In addition, most only have token annual increases to extend dividend streaks. Others with lower yields are less attractive for earning income. In the table, current yields along with dividend "streaks" (measuring the number of consecutive years each company has increased dividends) are shown:

Company

Yield

Streak

Procter & Gamble (NYSE:PG)

3.8%

56

Sysco (NYSE:SYY)

3.8%

43

Johnson & Johnson (NYSE:JNJ)

3.7%

50

Kimberley-Clark (NYSE:KMB)

3.7%

40

Emerson Electric (NYSE:EMR)

3.6%

56

Clorox (NYSE:CLX)

3.4%

35

RPM (NYSE:RPM)

3.3%

39

Air Products (NYSE:APD)

3.3%

30

Abbott Labs (NYSE:ABT)

3.3%

40

Bemis (NYSE:BMS)

3.2%

29

McDonalds (NYSE:MCD)

3.1%

36

Walgreen s (WAG)

3.1%

37

Click to enlarge

KMB, CLX, RPM and ABT stocks have done well in 2012 which has lowered their yields. Other stocks have not done well, like stock market averages. PG has the highest yield because the company has reduced EPS guidance twice in Q2 as a result of sluggish economic conditions globally. But it has paid dividends for 122 years (since its founding) and dividends have been raised annually for 56 years. Only a handful of companies have longer streaks. The yield at JNJ has also increased significantly. In the last 5 years, its sales have been flattish and the company has been hurt by numerous product recalls (Tylenol, Motrin, etc.). But it is a rare company that maintained a AAA credit rating and this year extended its streak of raising dividends to half a century. While other companies are working harder for increased earnings, higher dividends should continue for many years.

Financial security in retirement includes a growing income stream. That has become more important because capital appreciation is less predictable for increasing wealth and the value of growing dividends has been raised. Companies with track records of raising dividends have much greater importance so that dividend investors can better enjoy retirement. Higher income allows retirees to afford a better quality of life.

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