The number one reason people use a financial advisor is to maintain their lifestyle in retirement, according to a recent study by AARP.
BOOMERS AT RISK
Baby Boomers (those ages 46-64) make up the largest and wealthiest demographic in America today. With millions of them facing imminent retirement, and living longer than ever, it is critical that they be thinking more seriously than ever about the current investment environment. Specifically, a financial advisor can guide them in navigating the recent market volatility and find ways to preserve long-term value and liquidity.
Traditionally investors favor bonds and annuities when it comes to funds for retirement. However, these investments alone will NOT keep up with inflation.
A report by Clark Consulting found that Boomers prefer large-cap investing. At CAIM we recommend a strict diet of value-oriented, dividend paying stocks.
Why? We believe a portfolio of dividend stocks is likely to well outperform the S&P 500 Index and returns from Treasuries over a 20-year period. We would argue that a dividend paying portfolio also has limited downside risk as the companies able to pay dividends generally have reached at or near their long term growth expectations, are generally more stabilized, under leveraged, and more secure investments than “growth companies.”
According to our analysis, a $1,000 principal investment in a dividend paying stock, with a 3% annual dividend yield growing at 5% per year, and modest 5% annual stock price appreciation, would grow to over $4,000 (342%) at the end of 20 years. This return compares to just over 200% for Treasuries, and a 20-year actual historical return of 191% for the S&P 500. Don’t forget, as the chart indicates, the S&P 500 has been incredibly volatile over the past 20 years as well.
BULK UP ON DIVIDENDS
Boomers should buy dividend-paying stocks to stay ahead of inflation. As stock prices rise over time, compared to a bond, high quality dividend paying stocks also have the ability to increase dividends (yield), versus a bond, which has a fixed interest rate and can be called. Even in a down market, investors will collect a stream of income from the equities, so why not get paid while you wait.
However, it’s also important to remember that not all dividends are created equal. Just buying a stock for a fat dividend is not a great idea. Instead, look for companies that have the financial stability to continue to pay the dividend and increase the payout over time.
Copyright 2011, CAIM LLC
Disclaimer: NO CONTENT PUBLISHED AS PART OF THE CAIM LLC NEWSLETTER CONSTITUTES A RECOMMENDATION THAT ANY PARTICULAR INVESTMENT, SECURITY, PORTFOLIO OF SECURITIES, TRANSACTION OR INVESTMENT STRATEGY IS SUITABLE FOR ANY SPECIFIC PERSON. TO THE EXTENT ANY OF THE CONTENT PUBLISHED AS PART OF THE BLOG MAY BE DEEMED TO BE INVESTMENT ADVICE, SUCH INFORMATION IS IMPERSONAL AND MAY NOT NECESSARILY MEET THE OBJECTIVES OR NEEDS OF ANY SPECIFIC INDIVIDUAL OR ACCOUNT, OR BE SUITABLE ADVICE FOR ANY PARTICULAR READER. EACH READER AGREES AND ACKNOWLEDGES THAT ANY SPECIFIC ADVICE OR INVESTMENT DISCUSSED IN THE BLOG MUST BE INDEPENDENTLY EVALUATED BY THE READER AND HIS OR HER ADVISER IN VIEW OF THE READER’S INVESTMENT NEEDS AND OBJECTIVES.