What a daunting time to face retirement! The S&P 500 Index has plunged nearly 19% in just 13 trading days.
At the same time, investors have flocked to the safety of Treasury bonds, sending the yield on the 10-year to just 0.50%. That’s the lowest level ever, as shown below.
And yet, around 10,000 baby boomers are hitting age 65 every day. This is now the fastest-growing segment of the population (as I wrote about recently here).
The key to a comfortable retirement is to take withdrawals for years to come without running your nest egg down too quickly. So, you need to create a portfolio that generates income and a little growth.
For growth, stocks have historically been your best bet. They’ve averaged a return of 8.75% over the last 50 years. But if the last few weeks have taught us anything, it’s that stocks can come with bouts of volatility.
High-quality bonds are usually a good spot to park your money for stability. But right now, they hardly offer any yield.
Savings accounts pay 0.09% on average. If the Fed slashes rates more, they could even get worse.
So where can retiring investors find both income and growth right now?
Over 8 Times More Income!
For safety, growth and income, consider stocks of high-quality, dividend-paying companies. Here’s what to look for:
- Balance sheet health, with a low debt/equity ratio. A company has more money to pay shareholders if there aren’t many creditors in line first.
- Profitability, such as the gross profits/assets ratio. I’m a huge fan of understanding how efficiently a company uses its asset base to generate profits.
- Payout ratio, which is the ratio of dividends paid to net income. A low ratio means that a company has a better chance of sustaining its dividend, even if profits take a hit.
- Sales and earnings stability. In general, companies that pay a good dividend rate have stable end markets … think real estate investment trusts, utilities or consumer staples.
Once you have pinpointed high-quality companies, stock market pullbacks like this are a gift. You can grab a higher dividend yield on your investment — that’s how much dividend payments you take relative to your purchase.
Take the iShares Select Dividend ETF (Nasdaq: DVY) for example. This exchange-traded fund (ETF) generated a dividend yield of about 3.42% (using the last 12 months of dividend payments) to start 2020. Following the pullback, DVY now yields 4.26%.
This is the highest level in over 10 years, and over eight times the yield on a 10-year Treasury!
If you’re not already doing so, you should have a shopping list of high-quality, dividend-paying companies ready for investment. In this environment, they offer you the best shot for retirement income and growth.
Research Analyst, The Bauman Letter