Income Stocks

To eliminate stocks from your retirement income plan would be a mistake. Not only are some stocks significant income stocks (dividends of 4% annually and more) but their growth in dividends serves as protection from inflation. Take the following example of a retiree who enjoys traveling to Europe. The cost of a $5,000 vacation has increased substantially in US dollars due to the depreciation of the dollar. But if he had owned $5,000 of European stocks, the currency appreciation of those assets would have offset the dollar loss. The same idea applies to owning common shares in a clothing manufacturer to offset increases in your clothing or stocks in a food processor or supermarket to offset increasing costs of food. The same ideas applies to owning shares in a company that continually increases your dividend to offset rises in your cost of living

The chart below shows why during a 30-year retirement (e.g. from age 60 to age 90), the increasing income from stocks is essential as compared to holding money in bank CDs

Data 1/1/75 through 12/31/04. Dividends based on a $10,000 investment 1/1/75 in a basket of stocks representing the S&P500 from American Funds Distributors. Interest rates from Federal Reserve year end rate on 6 month CDs. You cannot invest directly in an index. Past performance is not a guarantee of future results and an analysis of a different period may have revealed different results.

A very sound method for investing in income stock is the Dow Dividend Strategy. This strategy has you buy the ten highest dividend yielding stocks in the Dow Jones Average. These are listed below as of 12/11/08 (from www.dogsofthedow.com).




Symbol





Company





Price





Yield





Small
Dog



NYSE / NASDAQ The Dow stocks ranked by yield on 12/11/08 on
12/11/08
on
12/11/08
on
12/11/08


BAC

Bank of America 14.91 8.58% Yes


PFE

Pfizer 16.56 7.73% Yes


GE

General Electric 17.05 7.27% Yes


AA

Alcoa 9.98 6.81% Yes


DD

DuPont 25.94 6.32% Yes


MRK

Merck 26.44 5.75% No


T

AT&T 27.94 5.73% No


VZ

Verizon 32.47 5.67% No


JPM

JP
Morgan Chase
29.94 5.08% No

KFT
Kraft 26.81 4.33% No

 

As you can see from the “yield” column, these income stocks pay very healthy dividends and this strategy of rebalancing this portfolio of ten highest yielders have persistently outperformed the market over the past few decades.