Where does one find a decent return on an investment these days?
For millions of Baby Boomers contemplating retirement, it's more
than a rhetorical question.
A report by the Wall Street Journal shows the soon-to-retire
generation, by and large, has not saved enough in their retirement
accounts and has some catching up to do. Others who have put their
money in certificates of deposit (CDs) are earning a paltry
Those whose investment has been wrapped up in their homes have
seen values decline 30 percent or more. For Americans who have
accumulated savings, the million-dollar question is where to invest
complaints about investment companies).
Get good advice
Before investing in anything, it is wise to consult a financial
advisor who is completely objective. In other words, an advisor who
does not sell an investment product but only offers financial
advice for a fee. One question to ask them is about
dividend-producing blue chip stocks.
Not all stocks pay a dividend, but many do. Paying a dividend is
one way a company returns a portion of its profits directly to its
shareholders. So, before a company can pay a dividend, it needs to
While banks are paying a little more than one percent on CDs,
blue chip companies like Johnson & Johnson, Campbell Soup,
General Mills, Chevron, and Kimberly Clark, pay dividends of more
than three percent. Altria, Eli Lilly, Bristol-Myers Squibb,
AT&T and Verizon, pay dividends in excess of five percent.
That means if you invested $100,000 in a balanced, diversified
portfolio of these high-yield stocks that yielded on average four
percent, your money would earn $4000 a year in dividends, as long
as the companies continued to pay those dividends. You would
receive the dividends, usually paid quarterly, whether the price of
the stock went up or down.
For funds in a tax-deferred retirement account, you might ask
your financial advisor about master limited partnerships (MLP) that
have issued common stock. MLP dividends tend to be even higher, and
while the tax reporting requirements can make them a nuisance for
small investors, there are no tax reporting requirements if the
shares are owned by a retirement account.
Too high can be a turn off
That said, stocks that pay a very high dividend are often a red
flag and should be avoided. It all depends on why the yield is
The dividend is based on the price of the stock. If a $10 stock
pays a dividend of $1 per share, for example, that's a yield of 10
percent. But the question to pose is, can the company really afford
to pay the dividend?
Let's assume the company set the dividend at $1 per share when
the stock was trading at $50, a conservative yield of two percent.
But if the stock price plunged from $50 to $10, the yield would
shoot up to 10 percent.
The question you would have to ask, however, is why did the
stock price plunge, and how much longer will the company be able to
pay $1 per share.
Last year, before the Gulf oil spill, British Petroleum (BP)
paid a dividend close to eight percent. However, in the wake of the
oil spill, it eliminated its dividend entirely, since it was
required to pay billions for the clean up.
And therein lies the risk with any kind of equity, including
dividend-producing stocks. There is no guarantee that the dividend
will continue, though most blue-chip companies have a long, stable
history of paying out to shareholders. Still, it is a risk that
must be carefully considered. The BP example shows that bad things
can happen to the most rock-solid companies.
When looking at a company's dividend, compare it to the
company's earnings per share. If the dividend is only half the
earnings, that's a pretty good sign. If it isn't, you should ask
yourself how the company can sustain that dividend.
However, before deciding where to invest your money, seek sound
financial advice and do plenty of homework.
Investors looking for a better return have turned to dividend-producing stocks....