Low-risk shares may counter lowered interest rates
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Dear Mr. Berko:
Last year I sold about $144,000 of our $196,000 in stocks to put in a safe money market account for two reasons: At ages 78 and 82, we need more income and our portfolio was yielding 1.2 percent, and I wasn’t happy with the way our growth stocks seemed to be performing. I put all the proceeds in a bank money market fund, which was paying 4.6 percent, and now it’s paying only 1.7 percent. I checked with several brokerage firms, and their money market funds were paying 2.3 percent. Certificate of deposit yields for one year are 3.2 percent, and as you know, Treasuries are paying a lot less. I know the Federal Reserve is lowering rates to help the economy. But while the Fed continues to lower rates, it hurts retired folks who have less to spend, who are a very large factor in the consumer economy. Low money market and CD rates are forcing my husband and me to cut back on our spending (even goldfish food) and really making it difficult for us to pay the rising costs for food, utilities, medicines, gasoline and repair bills. My husband and I would appreciate any suggestions you can give us to increase our spendable income.
S.W., Elgin, Ill.
Dear S.W.:
Yep, rates are low and probably headed lower while prices continue to rise. Many observers are certain the Fed will lower the discount rate several more times until the yields on six-month CDs fall below 2.5 percent and the yield on money market accounts drops below 2 percent.
This is scary for many retired folks who must dig into their savings to meet living costs. And every time you spend principal, it’s like losing blood and sometimes a body part. You’re saying bye-bye to money you’ve saved over a lifetime of working years, and you’ll never see those hard-saved dollars again. But you can increase your spendable income by giving away your goldfish, partaking of more church dinners, taking a part time job at Wal-Mart and considering a reverse annuity mortgage.
Consider an immediate annuity with a 12.2 percent guaranteed lifetime payout or rent a room to an Elgin Community College student — your home is just a couple of blocks from campus. There are other options that can increase your income nicely.
Meanwhile, I believe that small, carefully selected equities with very low risks are worth their potentially attractive rewards. I’m going to list 11 retirement investments that will add some comfortable “oomph” to your income and are trading at compelling values even in today’s market.
Citigroup 8.125 percent preferred (C-P) trading at $24.75. This single-A-rated issue has a $25 par, pays a $2.03 dividend of which 15 percent is taxable and yields 8.2 percent. Though Citigroup may reduce its common dividend, I’m confident that C-P will maintain its current value (give or take a point), and its dividend is sure as silver.
Bristol-Myers Squibb Co. (BMY-$21.71) is an $18 billion worldwide pharmaceutical and health-care company, and its shares haven’t traded this low in 30 years. The $1.24 dividend yields 6 percent, only 15 percent of which is taxable. Though earnings were only $1.09 per share last year, management expects to report $1.67 per share in 2008 and $1.98 in 2009. I believe there’s minimal risk at this price with good opportunity for dividend and principal growth. I believe BMY is a compelling long-term investment.
Pfizer Inc. (PFE-$20.81) is a $50 billion worldwide pharmaceutical and health-care company, and its shares haven’t traded this low in 20 years. The $1.28 per share dividend yields 6.2 percent, 15 percent of which is taxable. Earnings in 2007 were $1.21 per share, and management expects earnings of $2.37 per share this year and $2.57 in 2009. I believe PFE is an undervalued long-term growth and income stock.
Look at the AXA or MetLife variable annuities, both with a guaranteed 6.5 percent income and a very modest to aggressive 10-year growth potential. The sales charge and annual fees are included in the costs, like in a mutual fund. However, unlike a mutual, they provide a life income guarantee, principal guarantees and myriad other options that make this investment a cornerstone addition to your investment folio.
T. Rowe Price Tax-Free High-Yield (PRFHX-$11.23) is a no-load fund with a 4.95 percent current return. There is an anomaly in the tax-free market now, and the last time PRFHX traded below $11 a share was in 1987. The 4.95 percent yield is equivalent to a 6.6 percent taxable return.
Now consider Plains All American Pipeline LP (PAA-$48.55) with a 7 percent yield, TEPPCO Partners LP (TPP-$34.69) with an 8 percent yield and Enbridge Energy Partners LP (EEP-$49.50), with a 7.7 percent yield. These pipeline issues all trade near their 12-month lows and are considered compelling income and growth issues. The dividends are between 70 percent and 80 percent tax-favored. There appear to be very limited downside risks to these three issues, and each should make a comfortable addition to your portfolio.
Finally, consider the following electric utilities. CH Energy Group Inc. (CHG-$40.24) in New York state yielding 5.4 percent, Pinnacle West Capital Corp. (PNW-$36.48) in Arizona yielding 5.8 percent and Ameren Corp. (AEE-$45.07) in Missouri and Illinois yielding 5.6 percent.
This is a nicely balanced, low-risk portfolio that has a very modest to fair opportunity for income and principal growth. And I think you should be very comfortable adding some issues to your account, which will provide you with substantially better current income, most of which is tax-favored.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service
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