It’s never too early in the year to start planning around a critical year-end retirement issue: Required Minimum Distributions.
If you’re of a certain age, the RMD is a feature built into retirement plans like an IRA to force you to take some of your money out rather than keep it sheltered from taxes and growing indefinitely. You must take the money out by the end of the calendar year (12/31) or risk a penalty of 50% of the amount of the RMD.
With such a punitive event out on the horizon, actively planning is critical — both in regards to how much you’re taking out and what you’ll do with it.
While you can take the money and simply head off to that golf course you always wanted to play or simply sock it away for a rainy day, a better idea is to invest your RMD money in dividend paying stocks. This way you’ll see quarterly (or monthly) income coming back to you from that extra money.
Here are some ideas, with stocks with trailing price-to-earnings ratios under 20, implying a fair valuation, along with decent dividends that are over 3% and have a payout ratio of less than 60% of total earnings to show they are sustainable over the long term.
- PE Ratio: 18
- Dividend Yield: 3.2%
- Payout Ratio: 55%
One of the most tried and true dividend payers is restaurant chain McDonald’s (MCD), whose 37-year string of consecutive dividend increases is not going to end during your investment lifetime.
It’s an interesting time for MCD, as same-store sales have weakened over the past year, and international sales have stalled a bit. But as Dividend Growth Investor points out, earnings per share continue to rise. And that dividend, now sitting at 77 cents per share quarterly, will continue to grow along with those earnings.
McDonald’s has the ability to reinvent itself over and over, changing menus to reflect new consumer tastes and trends. The company now features salads and healthier foods, offers it’s “Dollar Value” menus to entice value-focused customers, added breakfast menus to its offering, and is even rolling out chicken wings — “Mighty Wings” — to compete across the entire segment.
Bottom line? McDonald’s is an institution, they never seem to run out of ideas and strategies to adapt, and your RMD money couldn’t be in a safer place.
- PE Ratio: 13
- Dividend Yield: 3.8%
- Payout Ratio: 49%
It’s been a bumpy ride over the last few year for leading chip-maker Intel (INTC), as the world slowly shifts away from a PC-centric model to mobile devices; indeed, tablet sales are expected to beat PC sales for all of 2013, and Intel is playing from behind in the market.
Lagging revenues and lower profits are keeping the stock down, and its very manageable P/E suggests a possible bargain price for your RMD money.
Throw in a dividend yield of well over 3%, and the investment potential looks even stronger. Despite losing some ground to up and comers like Qualcom (QCOM), Intel still holds the #1 spot in chip making, and the company sits on over $17 billion in cash, while generating $4.7 billion in cashflow, both based on June 2013 second quarter numbers.
Look, Intel isn’t the kind of company that’s just going to sit around and watch the tech-world go by; as Brad Moon points out, Intel is going to find it’s way into the mobile world over time, and with that move should come both revenue and profit growth. In the meantime, settle in for a steady flow of dividends and dividend increases on an annual basis.
It will be worth the wait.
- PE Ratio: 19
- Dividend Yield: 3.3%
- Payout Ratio: 60%
You know what’s not going out of style anytime soon? Clorox (CLX) products like Pine-Sol, Glad Bags, Kingsford Charcoal and Fresh Step cat litter.
In fact, it’s that kind of steady demand that’s helped to fuel a 36 year consecutive dividend increase run from Clorox, one that shows no sign of ending in the near — or even distant — future.
That’s not to suggest the company won’t have to work for you to earn those growing dividend checks: consumer products stocks are under pressure, and Clorox is under the gun to grow faster than its recent three-year 7% clip. The good news is that net income is growing thanks to increased gross margins and cost cutting. It’s nice to have pricing power.
That power is helping to drive operating cashflow of $775 million, easily covering CLX’s $335 million in dividend payouts last year. Bottom line? Your RMD dollars will throw off a nice 71 cents per share quarterly for that investment, with more to come down the road.
Kraft Foods Group
- PE Ratio: 17x
- Dividend Yield: 3.6%
- Payout Ratio: 49%
You know them, you love them: Oscar Meyer, Jell-O, Maxwell House and of course its famous Macaroni and Cheese are among the food brands left under the Kraft Foods (KRFT) banner after its split with Mondelez (MDLZ) last year.
What those iconic names mean for your RMD dollars is a steady stream of consumers heading down the aisles picking up products and growing revenues. Even nicer is the company recently upped its 2013 EPS expectations, adding 23% to EPS forecasts according to Adam Benjamin.
KRFT’s 50 cent per share dividend is an easy cover for KRFT, and with a payout ratio under 50% and nobody getting tired of macaroni and cheese, expect that dividend to increase nicely and for a long time. Just what you want from your RMD investment.
- PE Ratio: 18
- Dividend Yield: 3.1%
- Payout Ratio: 47%
Here’s yet another stock with brand names coming out of the shelves: General Mills (GIS). Wheaties and Lucky Charms cereals, Betty Crocker cakes, Gold Medal flower and Progresso soups are among the many offerings you’ll find all over the grocery store.
What all that product diversification means is a buffer against cost and pricing pressures in any one segment, and while perhaps not owning as wide a “moat” as one might find in other consumer sectors, GIS still pumps out a steady beat of earnings increases, including the last three in a row.
GIS sits on a nice stockpile of $775 million in cash, and for fiscal 2013 ending in May, it cranked out nearly $3 billion in operating cash flow leaving a very nice cushion to increase the current 38 cents per share dividend.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing does not hold a position in any of the aforementioned securities.
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