Always risk involved with money matters
December 12, 2011
Pardon me while I paraphrase Gary Hart, the presidential contender whose risky business derailed his campaign. He said something to the effect that, “If people think education is expensive, wait till they see what a lack of knowledge can cost.”
In a similar vein, I receive emails from readers who struggle with the consequences of dramatically reduced interest paid on FDIC-guaranteed CDs and other safe investments that have traditionally provided for the income needs of retirees. Try as we might to avoid it, there is no antidote that doesn’t involve at least some risk.
The challenge is to gain an understanding of, and come to terms with, the forms of risk that can be acceptable given the limited alternatives.
A careful selection of stocks can generate dividends in the 4 percent to 5 percent range with reasonable certainty. I have written about the so-called “Dogs of the Dow” in the past. These are the 10 stocks of the Dow Jones average that pay the highest dividend per share as a percent of the current stock price.
Right now, the Dogs’ average percentage income from dividends tracks at an annual 3.86 percent — about four times the rate on CDs. These 10 stocks are as follows: AT&T, Verizon, Pfizer, Merck, Kraft, Johnson & Johnson, Intel, DuPont, McDonlad’s and Chevron.
How would this work as an investment? Simple. Pick up the phone and establish an account at someplace like Vanguard’s brokerage services division and then have your bank wire some money to them the next time a CD rolls over.
Better yet, do it now. The “penalty” for cashing in a CD early is normally some percent of the interest earned, but with the interest at next to zero, there is effectively no penalty.
Once the money is at the discount brokerage house, direct the firm to invest equal amounts into each one of the 10 stocks listed above. If, for example, you sent $100,000, you would ultimately own $10,000 of each stock. The dividends normally paid about once every quarter would add up to $3,850 per year and would be swept into a money market fund. You could write checks against this account or have the money wired each quarter into your regular checking account.
The capital value of these stocks will fluctuate, but all you should care about, long term, is the dividend income they generate. Dividends per share tend to remain reasonably constant regardless of the stock price, because it’s a big deal when a company cuts its dividend.
Setting the Dogs aside, there are other companies paying far higher dividends. A collection including Avon, Lockheed Martin and Eli Lilly, for example, is paying an average of more than 5.5 percent per year. If buying individual stocks is out of your comfort zone, the S&P 500 index fund is paying an average dividend of more than 2 percent right now.
If the idea of taking risks is foreign to you, consider experimenting with a small amount of money. Use an incremental approach to get comfortable with the concept of having individual stocks chosen for their dividend payment potential. Forget the hope that they will double in value overnight. That is so ’90′s.
As for the capital value of your money, get this: there have been only a handful of 10-year periods in history where the Dow Jones average has actually suffered a capital loss, and never over any 20-year period.
I might point out that these dividend rates are about what an annuity would pay on the same amount of capital. The difference is that the annuity capital vanishes if you get hit by a bus. And there were insurance companies threatened with collapse when the market crashed. Therefore, eschew the free lunch and marketing pitch. I would prefer my money in the above-listed mix of huge company stocks any day.
Gary Hart pointed out that a lack of knowledge costs a lot more than an education. In the realm of personal finance you can sure say that again.
Stephen Butler is president of Pension Dynamics Corp. Contact him at 925-956-0505, ext. 228.
