In 1900, the
for Americans was 49 years. When the Social Security Act was passed
in 1935 , the life expectancy was less than 63 years. This is an
interesting data point considering the fact that
more or less codified the retirement age at 65. Taken literally
then, the expected duration of retirement was
negative two years
This made retirement planning, from a financial perspective, rather
easy. Technically, no planning was required.
Today, with life expectancies pushing 80 years (higher for females,
lower for males), planning is trickier. Specifically two burning
questions have emerged: How can a retiree not outlive his or her
money? And how can a retiree keep ahead of inflation? This
questions speaks to the latter concern.
Inflation is not the raging topic it was in the 1970s and early
1980s. But even at today's somewhat mild rates -- 1.5% over the
last 12 months ended March 2013, according to the Bureau of Labor
Statistics -- inflation can hurt and undermine your standard of
living. Over a span of 20 years,
inflation of 1.5%
will reduce the
of $1.00 to $0.74.
There are many ways to skin a cat when trying to outstrip
inflation, but one that I like is investing in stocks that grow
their dividend at rates faster than inflation. Here are eight such
stocks that I really like. As you can tell from the growth in the
dividends, they all handily beat the undermining effects of
But wait -- there's more.
There are lots of companies that grow their dividends -- not that I
am dismissing such an admirable feat out of hand. But these eight
companies have grown their dividends while simultaneously reducing
the percentage of their profits allocated to dividend payments. Now
that's a trick, my friends.
Within the context of our discussion, however, it's an important
one. Specifically, growing a dividend is fine, but a retiree has to
consider the following question: What is the likelihood that the
dividend will be cut or eliminated?
Companies that grow dividends simply by increasing the percentage
of profits allocated to dividends (known as the dividend payout
ratio) are overly risky in this regard. Mathematically, they are
going to run out of room to raise the dividend. Companies that
raise their dividends by allocating approximately the same
percentage of profits to dividends, but also consistently grow
their profits are less risky, but dividends might be cut if profits
shrink due to competitive pressures or a lackluster economy.
But companies that year after year are able to shrink their
dividend payout ratio present the least risk to your dividend
income. Why? Because even if profits decline for several years in a
row (think financial crisis circa 2008-2010), these companies have
the most flexibility to keep their dividend payment intact. Note
the rate at which these companies have been able to shrink their
dividend payout ratios over the past 10 years.
Source: Value Line Publishing LLC
There may be other companies you know of that have grown dividends
while simultaneously shrinking the portion of profits allocated to
dividends. Mergers, acquisitions, and divestitures all cloud the
picture, making some superstars hard to find.
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Gary Goldberg Financial