Berko: Healthy stocks vs. an annuity
Friday, May 23, 2014 6:00 AM
Dear Mr. Berko:
I’m 81 years old, and my wonderful wife of 58 years is 79. We have a solid portfolio of eight utility stocks, seven preferred stocks, three master limited partnerships and six real estate investment trusts, which is worth $316,000. We also have a $14,000 certificate of deposit coming due next week. Our broker is on vacation, so we spoke with another man in his office and asked him whether it would be better to buy 100 Johnson & Johnson shares or 200 GlaxoSmithKline shares. He told us he thought it would be better for us if we bought an index annuity because it would be safer and pay us at least 6 percent and we could never lose money. Please look at this attachment and give us your opinion.
C.S., Portland, Ore.
Several days ago, I received a letter and portfolio from a reader in San Antonio who needs more income. She has an account with Charles Schwab with eight different mutual funds, several of which are heavy front-end load funds. Even Charles Schwab brokers sell high-commission mutual funds. Anyhow, she, too, visited another broker for advice, and that broker also recommended an annuity. It’s just so hard to be a customer these days and get a fair shake. I have a friend who would exclaim, “Holy Hannah, Harvey and Harry, have brokers stopped recommending common stocks today?” And the answer is that all brokers are salespeople who work on commissions, and the firms employing them (J.P. Morgan, UBS, Edward Jones, Merrill Lynch, Wells Fargo, Morgan Stanley, etc.) demand that their salespeople meet quarterly commission goals. These days, brokers and mutual funds and annuities are bound together in “anastomosing unity,” as my son the doctor would say. A commission on a $10,000 mutual fund or annuity purchase ranges between 5 and 12 percent. But the commission on a $10,000 stock purchase might be 1 percent. So if you’re a broker with Edward D. Jones & Co., which product would you sell?
But it suffices to say I’ve never heard of that annuity. I never heard of the issuing company, nor am I familiar with any of the mutual funds it offers. So forget about it.
Meanwhile, buy 200 shares of GlaxoSmithKline PLC (GSK-$55.12). It yields a robust 5.4 percent and pays a $3 dividend, so 200 shares will give you $600 in dividend income. A hundred shares of Johnson & Johnson (JNJ-$101.02) would pay only $280 in dividend income and yield a dorky 2.8 percent. GSK’s share performance hasn’t been worth tiddly in the past 10 years, and revenue performance is anemic. However, a recent flurry of deals in the consumer health care sector should boost revenue growth. GSK’s strong dividend growth, averaging 8.5 percent annually in the past decade, has been aided by good net profit margins, which are expected to exceed 25 percent in the next few years. GSK could be in the midst of a turnaround because of several high-profile new drugs – Breo, Anoro and Tivicay – which are expected to be billion-dollar blockbusters. So I think GSK’s stock price could rise to the $75-$80 level in the coming five years, and the dividend could improve to $4.
JNJ is more than a pharmaceutical company; it also deals with medical devices, diagnostic tools, orthopedic joint reconstruction, skin care, baby care, wound care, oral care, over-the-counter medications, surgical products and energy drinks. JNJ is clearly a superior company and has raised its dividend every year for the past 30 years. Since 2004, JNJ’s tepid stock price has improved 50 percent; revenues have grown by 50 percent; earnings have nearly doubled; and its dividend has tripled. JNJ may be one of the best stocks for younger investors who want long-term growth and income, and 10 years from now, its $280 dividend on 100 shares may be $600. In fact, I think JNJ could double in price. However, that increase in market price won’t do so much for you as the current $600 dividend on 200 shares of GSK, which could grow to $900 in the next decade.
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