Investing for income, especially during retirement, is a common objective of many investors. Common stocks are typically considered for principal growth, but the dividend income they pay can provide a stable and growing source of cash.
Consider the following: The Vanguard 500 Index Fund paid an income dividend of $1.30 in calendar year 2000 and, via the underlying companies increasing their annual dividends, paid a dividend of $2.50 in 2008, or nearly double the amount in 8 years. Shorter term examples of the larger holdings in the fund include IBM raising its annual dividend from $1.10 in 2006 to $2.15 in 2009 (nearly doubling in 4 years) and Johnson & Johnson raising its dividend from $1.28 per share in 2006 to $1.80 in 2009 reflecting an 8%+ annual increase in income or far in excess of the rate of inflation.
As always, past performance is no guarantee of future returns and the global financial crises of 2008 and 2009 triggered some dividends cuts. The Vanguard 500 Index Fund paid an annual dividend per share of $2.10 in 2009, down about 16% from 2008. In contrast, the Vanguard Dividend Appreciation Index Fund saw its dividend fall about 3% in 2009 after going up 15% in 2008. The Vanguard Dividend Appreciation Index Fund emphasizes companies that have increased income dividends annually for at least 10 years and are expected to have the financial strength to continue to do so in the future.
If stocks are such a great source of growing income, why invest in bonds? As always, there are two sides to every story. Bonds pay higher current income and have less price volatility than stocks, hence providing an anchor to a portfolio in stormy weather. Therefore, portfolios diversified between stocks and bonds provide a smoother ride. Surprise, surprise, have you heard us preach about diversification before? But the take-away here is the value of a diversified stock portfolio providing growing income.
Saving money is increasing important in these economic times and given the winter weather that we’ve had, we would all be wise to pay more attention to our utility costs. I’ll admit I am an energy and conservation fanatic and started using compact fluorescent lightbulbs (CFL’s) way before they became mainstream. No cost strategies like unplugging the extra refrigerator or freezer (do you really use it much?), turning down the water heater, limiting use of hot water in laundry and turning off unused lights are really no-brainers. Simple investments like a timer thermostat pay off quickly. We recently had an “energy audit” done by an independent firm and were surprised at finding air leaks around our fireplace, windows, doors and ceiling light fixtures. This is costly during both heating and cooling seasons. Just like our advice, it is important to use a firm that isn’t selling new furnaces or insulation. If you would like more info on the local firm we used, please contact me. In the meantime, think spring!
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