If you have been gifted with the makeup to ride through an incident like 2008 without melting down, you have an advantage over the majority of investors. But many people have severe emotional reactions to what the market is doing. What I try to do in my Profitable Investing newsletter is to construct a portfolio that most people — particularly those at the cusp of retirement — can live with.
I love to find an investment with a great dividend yield up front. The benefits are numerous: With the 10-year Treasury currently at 2.6%, many stocks or funds have a higher going-in dividend yield than bonds. You get an inflation hedge whenever the dividend is raised. And if you capture some capital gains along the way, that’s icing on the cake.
Here are three of my favorite dividend investments to get you started.
Realty Income Corp. (Dividend Yield 5.1%)
This is a champion. Realty Income’s (O) dividend yield is a solid 5.1%, and the company has increased its dividend 65 quarters in a row. It owns single-tenant properties, mostly retailers that provide services people need day after day. Some of their tenants are companies like Walgreen (WAG), FedEx (FDX), and LA Fitness. Realty Income has 10- to 20-year leases and 98% occupancy on its properties, a metric that never budged during the recession. In short, Realty Income is a very boring business.
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And you want boring when it comes to your retirement income.
What’s the possible downside here? There’s the possibility that interest rates skyrocket. But that would only happen if inflation also took off. These leases include an escalator for inflation. As long as inflation sort of toddles along, I don’t see a rising interest rates as a problem.
ConAgra (Dividend Yield 3.3%)
ConAgra (CAG) is a food company with a dividend yield of 3.3%. It mostly focuses on private-label brands — what we think of as “store brands.”
We have, sad to say, a stratification of society in America. Some people at the top don’t give a second thought to their grocery bill, but a large number of people have to watch their budgets very carefully. The good news for them is that store brands targeted to these budget-conscious consumers are getting better and better in terms of quality. This is going to be a great trend for ConAgra long term.
At the moment, CAG is overexposed to lower-end, tight-margin products such as Banquet frozen goods, but ConAgra is reorienting its business. This January, ConAgra acquired Ralcorp, the largest producer of packaged foods in the United States. Though restructuring issues at Ralcorp have put a damper on ConAgra’s fiscal 2014 projections, I remain convinced that the Ralcorp deal will eventually pay off in spades.
What’s more, ConAgra will easily cover its $1-per-share annualized dividend out of the projected 2014 earnings ($2.22 to $2.25 per share). Growth-and-income investors should take this dip as a buy signal.
Emerging Markets Equity Income Fund (Dividend Yield 4.3%)
There are those who say you need 50% of your portfolio in foreign companies because 50% of global economic activity is overseas. But not many conservative investors are comfortable with that kind of allocation. Still, I would appeal to any investor to consider some foreign stocks because you can find world-class companies that are just as well-run as U.S. stocks.
The WisdomTree Emerging Markets Equity Income Fund (DEM) sports a generous 4.3% cash yield, and offers downside protection together with the potential for Dow-beating returns in 2014 if, as I expect, the “hot” money shifts its sights overseas.
The fund includes the highest-yielding stocks from the WisdomTree Emerging Markets Dividend Index. You’re getting a basket of the highest foreign dividend payers by dollar amount. The majority of holdings are big financial and energy-related names, including Gazprom (GAZP.ME), China Construction Bank (CICHY) and Vale S.A. (VALE). If one of the companies cuts its dividend, its weight in the index automatically drops.
Should you invest in these stocks individually? It depends on your risk tolerance, but many retirees are leery of overweighting abroad. The benefit of DEM is that it gives your portfolio the benefits of foreign diversification without undue risk.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.
