Dividend Investors, The Fed Doesn't Get It-But You Do!

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

A Bloomberg article in mid November highlighted the laments of the Federal Reserve over how retirees are causing the Fed's easing efforts to stall because retirees are saving rather than spending freely. This article stuck in my mind because retirees are acting rationally. When you can't earn a decent interest rate on a bank account and the economy is in a virtual stand still, is the Fed really expecting retirees to run out and spend money?

Think about this logic for a second. If you are retired you aren't working. That may seem obvious, but it's an important fact. Whatever savings you have built up are all you have and all you will likely ever have to live on. How can anyone expect retirees that are at a point where they are spending their savings to run out and buy new homes and cars in the current environment?

A BIG Group
It makes complete sense to scrimp and there are very few who would suggest otherwise. The problem lies in the fact that there are so many more retirees now than there have been historically. Thus, this group has an increasingly large impact on the economy. Anyone who has looked at the aging of the baby boomers understands this, since this one cohort has profoundly changed so many things in the economy. Indeed, retirement is just the next thing on the list. 

So what are you supposed to do with rates at such low levels and you at the point of needing to tap your savings? The first answer is to keep working if you can. The second answer is dividend investing. However, you need to be careful.

Build a Barbell
Running out and buying lots of high-yield stocks opens you up to a material amount of risk. Stocks with high yields generally have high yields for a reason. However, owning a collection of safer, but lower yielding stocks isn't likely to provide you with enough income. Thus, I recommend a barbell portfolio containing both high-yield and low-yield, high dividend growth stocks. The trick is not to rush your portfolio.

Take It Slow
Start by finding companies you would like to own and then wait for those stocks to fall in value and “come to you”.  For example, Dow-30 component McDonald's (NYSE: MCD) had a material share price advance leading up to 2012. Since the beginning of the year, however, its shares have taken a notable tumble. It's recently yielding around 3.5% with solid dividend growth prospects. If you had chased this stock for dividend growth late in 2011, you would have missed being able to get in at a yield at least one percentage point higher. Trust me, one percentage point means a lot when you are looking to live off of your dividend income.

I recently wrote about why McDonald's shares have faltered, but the end of the story is that this is more likely a buying opportunity than a falling knife. Every company hits a rough patch here and there and McDonald's is no exception.

Another name to watch is Johnson & Johnson (NYSE: JNJ). This Dow component has been sluggish for a number of years, but is easily one of the most diversified health care companies in the world. It's businesses span consumer products, pharmaceuticals, and medical devices. Its dividend growth has been impressive historically and it is rock solid financially. Conservative investors would do well to consider it.

I highlighted these two companies because it is important to see that you can find good companies with decent yields, and good potential for dividend growth, without having to take on too much risk. Moreover, they are easy to follow because they are two of the most watched companies on the U.S. exchanges. Find 10 to 20 such companies, which really isn't impossible, in 10 or so industries and you'll have a solid start on the dividend growth component of a portfolio. As a hint, start by looking at the Dow 30. 

Take It Even Slower With High Yielding Stocks
The high-yield side of the barbell will likely require more work and potentially more time to create. There are any number of income focused industries and asset classes that you can start with, including real estate investment trusts (REITs), limited partnerships (LPs), business development companies 9BDCs), and utilities. Finding safe high yields right now, however, is likely to be difficult, but it isn't impossible.

For example, Whtiestone REIT (NYSE: WSR) was recently yielding around 9%. I've written extensively about this company recently, posting a SWOT analysis and highlighting it as a small cap with a unique business model. In a nut shell, the company buys unloved retail properties in smaller markets in Arizona and Texas and rehabs them. The monthly dividend payer could make a nice addition to a portfolio, adding plenty of income to live off of today. The only problem here is that management has stated it wants to increase the dividend over time, but has yet to do so. That makes inflation a material risk for investors here if the company doesn't hike the disbursement. It is an important factor to watch.

Another option to look at would be Energy Transfer Partners (NYSE: ETP). The company's shares have been hampered by its recent acquisition of Sunoco. The deal was large and transformative, so there is reason to be concerned. However, with the purchase complete, Energy Transfer has a lot going for it. As growth projects come on stream, it should be able to start increasing its distribution again. Most likely at a decent clip. With a yield over 8%, this solid limited partnership could be the cornerstone of a high-yield barbell.

Neither of these high-yield investments is without risk, but if you take the time to understand the opportunities they present and how they operate, you should be able to decide if they fit your risk profile. This segment of your barbell portfolio will take more time to manage than the dividend growth half, but that shouldn't be surprising.

So, if you are a retiree, forget what the fed is trying to make you do and focus on what's right for you. That will likely mean cutting back some on expenses and investing in a way that provides you a combination of dividend growth and high yield.

Yours,


ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson and McDonald's. Motley Fool newsletter services recommend Johnson & Johnson and McDonald's. 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!

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