Dividend growth better bet than bonds
August 3, 2012 9:48PM
Updated: September 6, 2012 6:08AM
D ear Mr. Berko: My wife and I are 49, and both of us still have decent jobs. Both boys are out of the house, and we took your advice 12 years ago, advising the boys to join the armed services, which paid for their college educations. One boy is a Navy lieutenant and the other is a captain in the Army. Both have careers they enjoy and are married with children. And my wife and I have managed to save quite a lot of money, since the boys left home to join the Armed Services right out of high school.
So in addition to my pension and my wife’s annuity through her teaching job, we have saved $66,000 and need to invest it. A broker recommended investing 40 percent in several AAA bonds, 40 percent in high-yield bonds and 20 percent in preferreds with an average 5.1 percent now. Please tell us what you think of this investment with which our social security, my wife’s 403(b) annuity and my pension would be our retirement income in 20 years.
Dear DS: Good on you, and congratulations to your boys who must be handsome devils in their dress uniforms. Several times a year, readers will tell me how delighted they are that their ankle biters have college degrees paid for by the armed services. A father emailed me last year that his daughter is a physician, his son got a doctorate in an “ology” of some sort and both have careers in the military. Unfortunately, today colleges are more interested in getting bigger than becoming better. And using hard-earned money to send most kids to college for four years is like feeding $100,000 into a cesspool.
Those bonds might be a fine idea for folks in the middle 80s. Does this lad know you folks are only 49? His idea sucks. Now I only give investment guarantees twice a year, and I’ve already used up my quota, but in this case, I’m going make an exception. I guarantee that the future cost of our new health care legislation, like the escalating costs of Social Security, Medicaid, Medicare and other government assistance programs, will gusher out of control in the coming decade.
That means hugely higher taxes plus an inflationary spiral that may slurp the socks off your feet. But let’s be modest and assume no tax increases, just a 5 percent real inflation rate, not the cutesy numbers prepared by administration sycophants. After the first year of retirement at 5 percent inflation, $100 in fixed income bond interest will buy $95 worth of stuff, the next year $90.25 in stuff, the following year $85.75 of stuff and so on. So bonds are bad, and they will become “badder” in the coming years. But the “baddest” part is that inflation begins long before you retire.
There are many good pale blue chip issues yielding 5 percent to 7 percent that have raised their dividends nearly every year for the past 20 to 30 years and can do so again in the next 30 years. Issues like American Telephone & Telegraph (T — $37), ConocoPhillips (COP — $54), Reynolds American (RAI — $46), Kinder Morgan (KMP — $79), Waste Management (WM — $34), Plains All American (PAA — $87) and others are as easy to spot as the red nose on a clown’s face.
It doesn’t matter if the shares trade in a narrow range if the dividends keep growing. Just reinvest the dividends quarterly, and continue to accumulate additions shares. Then, without luck, by 2032, each thousand dollars you invest should grow to over $3,000, paying an annual income of about $160 per $1,000 investment. And because the dividends continue to grow, your annual income will also increase a bit in retirement years. It’s a no brainer.
Meanwhile, forget about Social Security when you hang up your tools because I doubt it will provide for you as it has for today’s beneficiaries. SS will be means tested, and your future income stream may disqualify you from benefits.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.