Martin is off today, enjoying a European vacation with his family. So he’s asked me to jump in with my views on how stock investors can significantly boost their income.
The topic has been on my mind lately – not just because I’m finishing up a report on my favorite income investments, but also because a lot of people close to me are starting to plan for life after work.
Case in point: Just this past Saturday my wife, Disha, and I helped throw a surprise 61st birthday party for her father.
At this type of gathering, two subjects inevitably come up: retirement and investments. And once word leaks out that I’ve written a book on investing, I always get roped into the conversation.
Here’s what I told them …
If You Want to Enjoy Retirement,
Don’t Count on Outside Help!
The formula for an enjoyable retirement used to be pretty simple: Work hard, pay off your house, put your kids through school, and then wait for your benefit checks to start showing up in the mailbox.
But things aren’t so simple anymore. For one thing, the payments you receive from Social Security won’t be enough to live on, even if you maintain a rather modest lifestyle. In fact, the maximum any worker at full retirement age can hope to receive in 2007 will be $529 a week.
Farther down the line … who knows? Not counting the effects of inflation, the Social Security Administration will need an additional $4.6 trillion just to maintain its promised payments over the next 75 years. That’s not my estimate, either – it’s straight from the agency’s chief actuary!
People lucky enough to have pension plans figure their companies’ payments will make up for any Social Security shortfall. That might be true for some … but only if their plans survive over the next few decades. After all, a lot of plans have completely folded in the last few years.
It’s sad, but true: When the going gets tough, many financially-strapped companies just hang their workers out to dry. It’s fairly easy to terminate promised retirement benefits – just ask workers at companies like U.S. Airways, Polaroid, or Bethlehem Steel.
Sure, there’s a government agency that’s responsible for picking up the tab for failed pension plans – the Pension Benefit Guaranty Corporation (PBGC). But it doesn’t insure every plan out there, nor does it guarantee the same payments promised by the original plan.
Here’s the worst part: The PBGC is currently in the red to the tune of roughly $28 billion! That’s right – the agency can barely handle all the plans that it’s currently responsible for. What does that say about the state of retirement in America today?
And I don’t even want to get started on the legions of Americans who were never even offered pensions … how inflation will erode the value of money over time … or the fact that people are living longer than ever before.
Instead, let’s start talking about my favorite way to build a nest egg that can both increase in value and throw off gobs of income …
Behold the Beauty of
Dividend-Paying Stocks
Whenever the topic of income pops up, most investors automatically expect the discussion to focus on bonds. That makes sense because all bonds are income investments.
Yet there’s another very mainstream investment area that often gets overlooked: Dividend-paying stocks. That’s a shame. Here are just four reasons why I like dividend payers:
- Dividends represent immediate, non-refundable returns. Once you receive your payment, it’s yours to keep. Meanwhile, paper gains can disappear in one day of trading!
- Companies that pay dividends are generally well-established, with steady businesses and long histories of profit growth. After all, you can’t keep paying out money to shareholders if you aren’t making consistent profits!
- During down markets, dividend-paying stocks often hold up better than those that don’t make regular payments. And when the markets are trading sideways, you’re still making money!
- Thanks to the Jobs and Growth Tax Relief Reconciliation Act of 2003, the tax rate on most stock dividend payments is now 15% for most people. A recent extension upholds that favorable rate through 2010.
So, if dividend stocks are so great, how come they get a bum rap from many investors?
My answer: They’re too boring and predictable. They don’t arouse the same kind of excitement as a brand-spanking new company that just came out with the latest, greatest gadget.
Here’s the irony: While people are out chasing their so-called “hot tips,†many dividend payers are quietly doubling, tripling, and quadrupling. In many cases, they’re doing it slowly and steadily. And when you’re trying to build a nest egg that you can live off of, isn’t a relatively stable, predictable end result precisely what you need?
Never underestimate just how powerful those regular cash distributions are, either …
From January 1926 through September of last month, the Standard & Poor’s 500 Index provided an annual average total return of 10.44%.
According to S&P, though, more than 40% of the market’s gain came from dividends! In other words, failing to invest in dividend-paying stocks would have generated much lower returns.
I just can’t get over that, no matter how many times I read it. It’s a real eye-opener, and the reason that I value dividends so highly, especially when it comes to …
Strategies for Building an
Income-Oriented Portfolio
If you’re as worried about having an enjoyable retirement as the people at my father-in-law’s party, now’s the time to take decisive action. Here are some steps worth taking …
First, there’s no such thing as saving too much money. Should you lock yourself in the house and do nothing on weekends? Of course not. Instead, look for a regular expenditure that you wouldn’t miss and start socking away the money instead. You’d be amazed at how easy it is to find some fat in your weekly budget.
Second, if you have access to a self-directed retirement plan such as a 401(k), contribute as much as you can. Not only will you lower your current tax bill, you’ll also grow your nest-egg as efficiently as possible. And if your employer offers a matching contribution, that’s like an extra return on your investment!
Third, consider putting some money in short-term bonds. I agree with Mike Larson that right now’s not the time to scoop up bonds with longer maturities. But for the extremely safe part of your portfolio, shorter-term Treasuries are a solid choice.
Fourth, don’t overlook dividend-paying stocks. While you need to be selective, the right dividend-payers can reward you with capital gains and regular cash payments.
If you’re uncomfortable buying individual issues, there are plenty of exchange-traded funds that specialize in dividend payers. Three examples: iShares Dividend Index Fund (DVY), First Trust Morningstar Dividend Leaders Index Fund (FDL), and the SPDR Dividend ETF (SDY).
Of course, I still think it’s possible to do even better by picking the right companies and employing the proper strategies. If that’s something you’re interested in doing, you might want to check out my special report, “Double-Dipped Dividends and Incredible Income Stocks.†It will tell you, in simple terms, what to look for when buying dividend stocks and how to maximize their returns. Plus, for more aggressive investors, I highlight a strategy that can get you two income streams from a single stock.
Fifth, please remember that it doesn’t matter if it’s your 31st birthday or your 61st … it’s always the right time to get your retirement plans in order!
Sincerely,
Nilus
P.S. “Double-Dipped Dividends and Incredible Income Stocks†will be ready this Friday, October 27, and when it comes off the press, it’ll cost $69.
However, if you want to get it at the discounted rate of $49, you can buy it right now. Not only will you save money, you’ll also get it e-mailed to you the minute it’s ready.
For more information and archived issues, visit http://legacy.weissinc.com
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short blurb: This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://legacy.weissinc.com
From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.
© 2006 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478
