There are various things retirees can do to protect the principal of their dividend portfolios. At the stock level, retirees can buy quality businesses with a minimum credit rating of BBB, a strong moat, and a long history of profitability at a margin of safety. Retirees should also ensure their portfolios are sufficiently diversified and build a cash reserve to sail smoothly through market downturns.
Looking at a company’s credit rating is one factor of quality that can be easily checked.
Companies that have manageable levels of debt, good earnings potential, and good debt-paying records will have good credit ratings. – Investopedia
A company rated as BBB or higher by Standard & Poor’s or Moody’s is considered investment grade. The higher the rating, the higher the quality. Retirees can add a layer of safety by investing in stocks that have a credit rating of BBB+ or higher.
Johnson & Johnson (NYSE:JNJ) and Microsoft Corporation (NASDAQ:MSFT) are both awarded the strongest S&P credit rating of AAA.
Earnings or cash flow stability
Depending on the type of the company, you would want to look at its earnings or cash flow history to see how stable its profitability is and if the company tends to grow its profitability over the long run.
For example, Johnson & Johnson has increased its earnings per share every single year since 1999. Retirees should strive to own this kind of company to protect the principal of their dividend portfolios.
Can the company increase its profitability?
A quality company should be able to maintain, or better yet, increase its profitability into the future. Companies with strong competitive advantages (or moats) can do so.
Morningstar identified five sources of a moat: network effect, intangible…
Unfortunately, I’ve reached the word limit for this (primarily) excerpt from my Seeking Alpha article, which you can access for free here: Retirees: How To Protect The Principal Of Your Dividend Portfolio.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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