The Best Investment You Can Make for Retirement

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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The long-term cost of retirement scares a lot people. And for good reason.

Without earned income, you are dependent on Social Security, your private pension (if any), and whatever financial assets you’ve accumulated over a lifetime of working, saving and investing.

Making the challenge greater still, Americans are living longer than ever. And the average human life span is increasing each year. That means your investments have a lot of heavy lifting to do. (After all, you don’t want your portfolio to kick the bucket before you do.)

What is the best asset to make your retirement dreams come true? It’s no contest: dividend-paying stocks.

Dr. Jeremy Siegel, a professor of finance at The Wharton School of the University of Pennsylvania, did a thorough historical investigation of the performance of various asset classes over the last 200 years, including all types of stocks, bonds, cash and precious metals.

His conclusion? Dividend stocks outperform everything else over the long haul - and almost certainly will in the future, too.

During market declines, dividend-paying stocks hold up better than nondividend-paying stocks, often fighting the broad trend and rising in value. There's a good reason for this. Dividend payers tend to be mature, profitable companies with stable outlooks, plenty of cash and long-term staying power.

Bear in mind, U.S. companies are sitting on a record amount of cash right now, more than $2 trillion. Most corporations are hiring slowly (if at all), and they're not boosting spending. So a lot of this cash is rightfully going back to shareholders.

Over the last 50 years, the highest 20% yielding stocks in the S&P 500 returned 14.2% annually. That's good enough to double your money every five years - or quadruple it in 10. And if you were even more selective, say investing only in the 10 highest-yielding stocks of the 100 largest companies in the S&P 500, your annual return would have been even better, 15.7%.

This is where investors planning for retirement should be putting their money to work today.

After all, bonds - which should carry a warning label at the moment - are sporting record-low yields. (And their market value will decline as interest rates rise.) Money market funds pay less than one-tenth of 1%. But many dividend-paying stocks are reasonably valued and will boost their payouts substantially in the years ahead.

Over the past 50 years, the S&P 500’s dividends have grown an average 5.7% a year, well ahead of the average 4.1% inflation rate. The key for retirees is this creates an income stream that is growing faster than inflation, maintaining and increasing your purchasing power.

A couple of caveats here. You can expect stock prices - even dividend-stock prices - to decline sharply from time to time. Retirees have to be prepared for this, not only financially (with a reasonable amount of monthly living expenses set aside) but mentally. If you’re living off the income stream - and therefore don’t have to sell - you can ride out the downturn and wait for the eventual recovery.

Also, while dividends are far less volatile than stock prices, they do go occasionally get cut. Between late 2008 and early 2010, for example, companies in the S&P 500 reduced their dividends by 24%.

But this was during the biggest financial crisis since the Great Depression - and dividends were soon on the upswing again.

In short, bonds leave you vulnerable to the ravages of inflation. Stocks offer inflation protection: share price appreciation and rising income.

That’s why I say that if you want growth, you should invest in dividend stocks. If you want income, you should invest in dividend stocks. If you want to reduce portfolio risk, you should invest in dividend stocks.

If you expect to live a long and comfortable life, make them a centerpiece in your retirement planning.

Good investing,

Alex

Have thoughts on this article? Leave a comment below.

Editorial Note: If you're auditioning income-generating stocks for your portfolio, it's crucial that you consider just how likely those dividends are to get cut. There are a number of factors to look at, including cash flow... historic payouts... potential growth... and more. To make performing this analysis easier, Marc Lichtenfeld has developed SafetyNet Pro. Subscribers can access this easy-to-use online database 24 hours a day. Click here to learn more.

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An Income Play With a Long History of Dividend Increases

Dividend-paying stocks have grown increasingly popular as investors become concerned about the state of the market. The good news is that owning proven income generators is an excellent all-weather strategy. Which is precisely why The Oxford Club launched The Oxford Income Letter back in 2012.

Based on Marc Lichtenfeld’s proprietary 10-11-12 System, this monthly newsletter gives readers the tools to create an unbeatable income portfolio. Today, let’s look at one of Marc’s original picks - still rated a “Buy” - Texas Instruments (Nasdaq: TXN).

The company is one of The Oxford Income Letter’s biggest winners, up 78.6% since its initial recommendation. Here’s an excerpt from a recent update sent to subscribers:

“Like a stereotypical firstborn, Texas Instruments has proven to be reliable and structured. The stock goes up and so does the dividend...

“Last month, Texas Instruments reported third quarter results, which handily beat Wall Street estimates and propelled shares even higher. In the quarter, the company earned $0.76 versus the $0.62 expected by analysts. Top-line results were also higher than expected. Texas Instruments reported $3.53 billion in sales - $150 million more than anticipated.

“And the good news didn’t end with the third quarter. Fourth quarter guidance was above what Wall Street expected, too. For the fourth quarter, Texas Instruments expects to earn $0.64 to $0.74 on $3.07 billion to $3.33 billion in sales.

“But more importantly, the company’s business continued to throw off a lot of free cash flow (FCF). In the last quarter, Texas Instruments generated $1.27 billion of FCF. In the last 12 months, the company produced $3.6 billion in FCF.

“During the same period, Texas Instruments paid out $1.41 billion to investors in dividends. With a payout ratio just north of 39%, the company will still be able to continue rewarding investors with double-digit increases, even if FCF declines.”

- Alexander Moschina with Kristin Haugk

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