Sunday, March 3

Week 87 - Stocks for Retirees

Situation: Here’s a dilemma that faces all retirees: You can’t “play” the stock market anymore because you don’t have time to “wait out” a downturn in the economy. A recession is bound to carry down your economically sensitive stocks with it.

To have a sound investment strategy, you should still maintain a 1:1 ratio of stocks to bonds (including savings bonds and certificates of deposit). You'll have to allocate most of the stock portion to low-risk mutual funds, like the balanced funds from Vanguard (VWINX & VBINX). But you can still put some money in large-capitalization stocks that behave like a hedge fund, i.e., those that a) lost less than 65% as much as the S&P 500 Index during the Lehman Panic, b) continue to maintain a 5-yr Beta less than 0.65, and c) beat the S&P 500 Index over the past 20 yrs (for a discussion of this, see Week 76). For additional safety, you also need to stick with buying stock in only the largest companies, namely, those found in the S&P 100 Index that are capitalized with A-rated stock. For added safety, stick to companies that are Dividend Achievers, i.e., increased their dividend 10+ yrs.

Our analysis finds there are only 10 such companies (Table). We added General Mills (GIS), since it has increased dividends for 9 yrs and is large enough for the S&P 100 Index. We also have added NextEra Energy (NEE), a Dividend Achiever that is also large enough. Ten of these companies are from the 3 defensive industries (consumer staples, health care, utilities) that we draw on for our Lifeboat Stocks category (Week 50). The remaining two are IBM and McDonald's (MCD).

When we find a low-risk A-rated stock issued by a company in one of the 7 non-defensive industries, and it has a dividend yield as great as the S&P 500 Index, we call it a Core Holding (Week 22). Those stocks are hard to find but that’s where you’re most likely to double your money in 10 yrs. In our Goldilocks Allocation (Week 3), we encourage you to strive for balancing your stocks at a ratio of two dollars in Core Holdings for every dollar in Lifeboat Stocks. For the 10 stocks in the Table, using that strategy would result in 1/3rd in MCD, 1/3rd in IBM and 1/3rd in one of the 9 Lifeboat Stocks like Wal-Mart Stores (WMT). Bear in mind that all 12 are “hedge” stocks so you won’t need to backstop them with savings bonds as long as you invest consistently in small portions by putting $300/qtr into a dividend reinvestment plan (DRIP) for each.

Bottom Line: You need to continue saving after you retire, and half of your savings need to be in stocks. Why? Because you'll probably be living a long time and your expenses might surprise you: Stocks are necessary to keep up with inflation. To guesstimate your future expenses, keep an eye on what it costs to send a student to a private college for a year. (In 2010, it was $32,617 for tuition, room & board according to the National Center for Education Statistics.) Then multiply that number by however many years you have left before reaching 90. Shocking, isn’t it?? Re-do the calculation each year.

Risk Rating: 2.

Full disclosure: I am retired and personally maintain DRIPs in 10 of the 12 stocks highlighted above: MCD, WMT, GIS, NEE, ABT, IBM, JNJ, KO, PEP and PG.

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