John Meredith is sure hot on dividend-payers. This year, the
retired electronics engineer bought shares in seven
dividend-paying companies:AT&T (
),Cisco Systems ,Coca-Cola ,General Electric ,McDonald's
andProcter & Gamble .
Three of the stocks' prices have risen in the
this year, while four have dipped as much as 2%. Together, this
year the group has averaged a 1% gain. But the bigger reward:
After Meredith bought their stocks, several companies raised
their dividends -- a fetching 9.2% average.
Meredith now holds 14 dividend payers and may get more this
year. "Given the inflation factor, it's a good strategy to have
increasing income," said the resident of Colorado Springs, Colo.
"And as a bonus, you get a more favorable tax treatment on stock
dividends than on the interest from bonds."
His moves seem to buck conventional wisdom -- that those with
should shift to such "safer" investments as bonds. But amid
today's longer life spans, some market players are embracing a
newer view: that retirees should keep sizable stock allocations
-- tilted toward dividend-payers with their potential for stock
price gains and dividend income growth.
"There is literally a danger of outliving your money if you
can't generate enough income from your portfolio," holds
investment adviser Laurie Itkin, of Coastwise Capital Group in
San Diego, Calif. Indeed, she feels "the typical asset allocation
model of 40% bonds, 60% equities is archaic and even
Meredith likes the dividend-growth story he's been seeing.
Among the shares he bought,Cisco Systems (
) this year raised its dividend 11.8%, andCoca-Cola (
) boosted its payout 8.9%. He'd bought such stocks for the safety
their strong corporate management provides -- and for their
dividend yields in excess of 3%.
Too Rich To Switch?
"With dividend payers like these, you think harder about
shifting your asset allocation to more heavily favoring bonds,
even after interest rates rise," Meredith said.
Overall, fully 1,078 U.S. companies raised their dividend in
this year's first quarter -- the highest number for any first
quarter, says Howard Silverblatt, senior index analyst at
Standard & Poor's Dow Jones Indices (SPDJI), in New York.
Moreover, dividends paid by companies in the S&P 500 stock
index could hit a record $350 billion this year, he says.
However, dividend-paying stocks weren't the rage early this
year. And dividend cuts are always possible: In July 2009, at the
peak of dividend-trimming in the last recession, 83 S&P 500
companies were cutting their dividends, while 26 others were
suspending them, according to SPDJI data.
On the horizon, many experts foresee interest rates rising
from today's low levels, which would hurt bond prices. And even
though the trend would produce more alluring bond yields, "it
wouldn't signal the need to sell dividend-paying stocks," holds
Silverblatt. "Often, when bond yields go up, stock dividends also
Looking ahead, some investment advisers see ways to be able to
keep one's equities allocation at least steady -- even when bond
yields get enticing. One possibility: substantially overweighting
dividend-paying stocks in an equities portfolio, and as
fixed-income issues mature, reinvesting them in higher-yielding
bonds, says Keith Klein, owner of Turning Pointe Wealth
Management, in Phoenix. Overall, he believes retirees should keep
a very minimum 45% weighting to equities.
Siren Call Of High Bond Yields
But some experts have a different view. "Currently, in
relation to bond yields, a portfolio of high dividend yielding
stocks looks attractive," holds Robert Johnson, finance professor
at Creighton University. But if bond yields hit "reasonable
levels" -- say, to about 5% in the 10-year Treasury note -- he
believes investors would cotton to a larger bond allotment and a
"more conventional asset allocation." For retirees, he says that
could translate to "more like 60% bonds, 40% stocks."