Seniors who are living off all or a part of their retirement savings should be keenly interested in current income and safety of principal. The amount of risk that one is willing to take to generate greater returns in one’s portfolio should based on one’s specific time horizon and the amount of dollars that will be withdrawn each year from the fund to support one’s lifestyle.
In my case, I have segmented my retirement assets into two buckets: conservative and more aggressive. I will withdraw monies from my conservative bucket first, thereby providing more time for the more aggressive segment to, hopefully, grow at a rate commensurate with my risk.
Those facts notwithstanding, if sufficient income can be generated with low risk investments, such an environment is to be celebrated. There are investment options available this year that might just provide that income with low risk.
One such choice is a Master Limited Partnership. The two largest of this type of investment are: Enterprise Products Partners ($52 per share), currently yielding 5%; and Kinder Morgan Energy Partners ($84 per share), earning 6.3% currently.
Master Limited Partnerships are publicly traded on the major stock exchanges and combine the benefits of a limited partnership with the liquidity of a publicly traded security.
Since MLP’s are classified as partnerships, they avoid corporate income tax at both the state and federal levels.
Moreover, limited partners are entitled to utilize their proportionate depreciation deductions, based on their investment in the partnerships. Typically, MLP’s invest in the energy sector, such as oil, gas and coal, but also the transportation of such materials. Those MLP’s that have confined themselves to the transportation sector have proven to be somewhat immune to price fluctuations in the underlying natural resources they move, and thus have more stable prices.
Electric utility stocks were the only losing major sector in the S & P 500 last year, but with dividends cranked in, they still generated a 1% return. This year, things should be better, since many of these utility stocks pay dividends of upwards of 4%. The three largest are Duke Power, Southern Company, and Dominion Resources. Each of these stocks pay a 4% or greater dividend, based on their current prices.
For those who are more disposed to more passively managed funds, the Utilities Select SPDR fund invests in electric utilities within the S & P 500, and currently yields 4.1%.
On the individual stock side, two stocks that have appeal are Delta Airlines, which currently trades at around $13 per share. Airlines in general have returned to profitability, and Delta is expected to report 2012 earnings of around $1.5 billion. This year, analysts are looking for a 38% growth in profits, and this expected growth is a reflection of some important strategic moves that Delta has made: (1) reducing capacity by about 10% such 2005; purchasing an oil refinery; and snapping up Singapore Airlines’ 49% stake in Virgin Atlantic. This final stratagem will provide Delta with greater gate space at London’s Heathrow Airport. Additionally, Delta recently signaled that it will begin to pay dividends in the near future. This would be a rarity in the airline industry. I would hold Delta just long enough to enjoy capital gains treatment on my profits.
One final stock that I like a lot is Regal Entertainment, since I am an inveterate movie goer. The largest theatre operator in the country, with 7000 screens, sells for 15 times projected earnings. Regal shares grew at a 16% pace last year, but their dividend payout of 5.9% and an expected rise of 3% in revenues should continue to keep the stock price up.
As always, check with your stockbroker to get his or her take on these suggestions.
If you have a financial question, email Greg at firstname.lastname@example.org
Full disclosure: Greg Roberts is a certified life underwriter and a Certified Financial Planner. He holds an MBA from the Wharton School of Business. He is also the brother of Athens Patch editor Rebecca McCarthy.