If Wally Forbes Had Interviewed Me...

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wallace Forbes, of Forbes magazine, recently interviewed David R. Reiser of Morgan Stanley Wealth Management.  Mr. Reiser spoke of the difficulties his mother and other retirees have with maintaining income in their golden years with current interest rates abysmally low.  Reiser recommended three different stocks for retirement income, namely AT&T, Chevron (NYSE: CVX) and Philip Morris (NYSE: PM).  He recommended them, in part, on their dividend growth prospects.  While I possess none of the credentials Mr. Reiser has, I would like to recommend three alternatives.

First, instead of AT&T, go with Enterprise Products Partners (NYSE: EPD).  Both companies pay a similar dividend at the moment, 5.4% for AT&T vs 5.3% for Enterprise.  However, according to The Motley Fool website, since 2009, AT&T increased its dividend four cents a share each year, about a 2.4% increase.  Enterprise has typically increased its dividend 12 cents a year, or 5.5%.  More importantly, Enterprise’s five year earnings growth rate increased 17.81% while AT&T’s declined 17.39%.  While AT&T generates three times the revenue as Enterprise, Enterprise is a growing part of the growing domestic energy production industry.  Enterprise has billions of dollars of capital expansion projects underway which should help it continue delivering growing dividends to its investors (read more on Enterprise here).

What does this mean for a retiree?  If dividend growth trends continue, in three years, Enterprise will be paying more dividends than AT&T.  After 10 years, Enterprise will have paid 13% more in cumulative dividends than AT&T.  Enterprise may not have the decades long track record of dividend payouts like AT&T, but for the foreseeable future, Enterprise looks safe and with better dividend growth track record.

Second, instead of Chevron, I’d recommend ExxonMobil (NYSE: XOM).  Both of these companies are integrated, “Big Oil,” petrochemical companies. Both companies have a similar dividend payout rate of below 30% and both have an average five year dividend growth rate of around 7.7%.  Chevron pays 3.3% dividend and Exxon pays 2.6%.  Exxon, in my opinion, may be a safer bet.  It’s larger than Chevron and reports higher returns on equity, assets, and investments.  Not that I think Chevron will collapse anytime soon, I simply see Exxon and a bigger safer investment.  Unfortunately, you pay for that safety with a slightly lower yield.  However, this latest year, Exxon increased its quarterly dividend 21% (from 47 cents to 57 cents a share) compared to Chevron’s 13% increase.  Hard to say if this dividend growth trend will continue, but Exxon’s 120 production projects currently underway will certainly help.

Lastly, Philip Morris.  As an income investment, Philip Morris has a lot going for it.  The current dividend is 4%.  Morningstar gives it five stars, Motley Fool CAPS rates it five stars.  Standard and Poor’s gives Philip Morris an “A” credit rating.  The company has only been paying dividends since 2008, so a track record hasn’t been established.  However, the dividend has climbed every year, this past year especially.  However, I’m a doctor and Philip Morris makes cigarettes.  I have an ethical problem with investing in a company making things called “cancer sticks.”  If you have similar qualms, Kimberly Clark (NYSE: KMB) might be for you.  Kimberly Clark is another Morningstar five star, S&P “A” company, but four stars by CAPS.  Today, Kimberly Clark pays a 3.4% dividend, lower than Philip Morris.  On the other hand, Kimberly Clark has been steadily paying increasing dividends since 1985 with a recent five year dividend growth average of 7.05%.  With a return on equity of 35%, a manageable debt, and ongoing efforts to streamline its business and shed less profitable operations, I think Kimberly Clark will continue its habit of increasing its dividend.

Final Foolish Thoughts

During his interview, Reiser mentioned an income portfolio managed by Schafer and Cullen.  In 1999, the portfolio returned 3.3% in dividends.  Today, the yield would effectively be 8%.  Alternatively, you can invest today in a basket of Enterprise, AT&T, Chevron, Exxon, Philip Morris and Kimberly Clark and immediately enjoy an average dividend yield of 4%.  Assuming past trends in dividend increases hold, in 12 years, that portfolio will yield 8.5%.  With research of your own, you may find stocks with even better dividend growth.  The point is, if you do your homework, you can develop your own superior dividend portfolio rather than pay someone else to manage your affairs.  And help secure your financial future in the process.


dylan588 owns AT&T. The Motley Fool recommends Chevron, Enterprise Products Partners L.P., and Kimberly-Clark. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus