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On money

Dividend-paying stocks can aid retired investors

By HELEN HUNTLEY
Published November 30, 2003

Fixed incomes and low interest rates might be retired investors' biggest money gripes, but they aren't insurmountable obstacles. One way to take aim at both is to buy stocks of financially healthy companies with a track record of rising dividends.

"It's like sensible shoes; it's not elegant, but it could save your life," said Carol Lippman, a portfolio strategist for A.G. Edwards & Sons in St. Louis. She created a "diversified stock income plan" based on this approach that Edwards brokers use with their clients. The principles that underlie the strategy are available to any investor who has a chunk of capital to invest and the time and ability to do some research.

Companies with a track record of rising dividends are a select group. Lippman said only 8 percent of publicly traded companies on the major exchanges raised dividends in at least nine out of the previous 10 years.

Some on her list have delivered more than 40 consecutive increases, including Procter & Gamble, Cincinnati Financial Corp., Johnson & Johnson, Emerson Electric, Washington REIT and Vectren Corp.

But if a company is paying out a high percentage of its earnings, it might not be able to continue raising dividends. Lippman recently dropped Kellogg Co. from her list because of concerns about slow earnings growth. Although her portfolio has some real estate investment trusts with yields of 5 to 7 percent, the average yield is about 3 percent.

"High yields are usually high for a reason," she said.

The dividend strategy is safest if you have a diversified portfolio representing at least six to eight sectors. Lippman says 25 stocks is ideal; you essentially create your own little mutual fund. You also need some time, at least five years, to give the strategy a chance to produce results. Longer is better.

Historically dividend growth has been a way to beat inflation. T. Rowe Price Associates looked at the income generated by the Standard & Poor's 500 Stock Index over the past 20 years. Based on the initial investment, the dividend yield climbed from 5 percent to 11.4 percent, while the portfolio increased in value more than 600 percent.

Dividend-paying stocks tend to lag when the market is rising sharply, but the dividends act as a cushion when stock prices are falling. As an added bonus, most stock dividends will be taxed at a lower rate than interest income under the new tax law. That alone is expected to give companies more incentive to increase their dividends.

Because stock yields are generally lower than bond yields, income-seeking investors probably are not going to opt for all-stock portfolios and nobody is suggesting that they should. However, a rising dividend strategy can add an element of growth to a portfolio heavy on bonds and CDs.

Q. I am trying to improve my credit. Would it help if I close old accounts that I no longer use? They have zero balances.

No. Your credit score is based on many factors, one of which is the length of your credit history. Old accounts show you have been using credit a long time. Keep the accounts open so the lender will continue to report them to the credit bureaus. If you want to reduce the number of accounts you have, you are better off closing accounts you opened more recently.

Q. I am 79 years old and my wife is 77. We are considering a reverse mortgage. From what I've read, it seems like a good choice for us. What do you think?

Reverse mortgages are an excellent choice for many older people. You can borrow against the equity in your home without having to pay anything back until you move or sell the house. Low interest rates have made these mortgages a better deal than in the past, but the fees to set one up are still high.

Reverse mortgages make the most sense if at least one of you is likely to live in the house for at least another 10 years, effectively spreading the cost of the loan over many years. As a short-term loan for just a few years, they are quite expensive. However, you might be willing to pay the price if you need money and don't like your other options, such as selling your house and moving to a less expensive house.

- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified November 30, 2003, 01:16:37]


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