Piddly 2013 Social Security COLA: Tips for Seniors Feeling the Need to Dive into Dividend Stocks.
We won’t know for another month what the exact 2013 cost-of- living adjustment for Social Security benefits will be. The annual adjustment is based on the year-over-year change in inflation for the third quarter. That said, both the Congressional Budget Office and the Social Security Administration expect next year’s inflation adjustment to be less than 2%.
That’s less than half the rate of increase in health care inflation over the past year.
And anything under 2% is going to be less than a third of the increase in food costs.
Add in at least two more years of the Federal Reserve’s zero-interest rate policy, and it’s pretty impossible for anyone living on a fixed income to generate any risk-free income.
All that suggests that 2013 will be another year where income- starved investors continue to glom onto dividend paying stocks, where income yields are often 3% or higher.
And that can be a very risky move these days, as YCharts has reported in an article explaining the benefits of dividend growth.
Utilities and telecoms are classic widows and orphans dividend payers. But lately, some of the most popular dividend players have seen their valuations rise sharply, in large part because of the surge in interest in dividend payers. Folks in search of income are bidding up the prices for companies with moderate -- if not outright slow-earnings growth -- triggering big increases in PE ratios.
While seniors on a fixed income may be feeling the need to venture into dividend paying stocks, a few rules of the road may help navigate through potholes.
First off, it’s still a stock. And even the most solid dividend paying stock is going to take its hits when the market falls.
The $9.5 billion SPDR S&P Dividend ETF (SDY), which focuses on firms with a long history of dividend increases, has a nice 3% yield and strong performance of late.
But that chart belies the fact that when markets swoon, not even a 3% dividend is going to protect you like bonds.
Here’s what happened during the 2011 summer of debt-debacles (our debt-ceiling mess and a flare up in Europe’s as well):
And here’s the chart every prospective dividend investor should use as a litmus test: 2008.
You get the idea: dividend stocks are still stocks. Redeploy your cash and bonds into dividend payers with eyes wide open to the potential risk.
To help manage risk, focus on companies with a history of dividend growth and ample earnings growth and cash to keep the dividend payments coming. Using YCharts you can check a company’s dividend payout trend line and free cash flow. YCharts Pro provides a snapshot of a firm’s cash dividend payout ratio: the amount of the current total dividend payout relative to the cash kitty. The lower the better.
A few examples:
Abbott Labs (ABT) has a solid history of increasing its dividend, there’s also been a long-term rise in free cash, and the payout level is below 50%.
Those are just a few examples. Using the YCharts Stock Screener you can vet potential dividend stocks to make sure you’re not paying too much for yield.
Filed under: Investing Ideas