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.
This article is for investors who are retirees or close to retirement.
Ultimately, most retirees want safe income – cash they can use every day to pay the bills and enjoy life. So, the goal of a retirement stock portfolio is to generate enough income for those uses.
How much income do you need to earn from your dividend portfolio?
You will earn income from your dividend portfolio and other sources. To figure out how much income you need to earn from your dividend portfolio, you first need to know how much income you’ll be earning from other sources such as pensions or perhaps a part-time job.
Dividend Income = Desired Income for Retirement – Income from Other Sources
For example, if you desire $50,000 of retirement income and you earn $10,000 from other sources, then, you’ll need to earn $40,000 of dividend income.
Want to create a secure, growing income stream from your dividend stock portfolio? What are the characteristics of the safest dividends? Investors buy dividend stocks for the stable income. So, it’s essential to choose stocks that generate safe, growing dividends.
The characteristics for the safest dividends include:
culture of increasing dividends, and
conservative payout ratio
Stable Business. Stable Earnings.
Behind each stock that pays a dividend is a business. If the business is not profitable, it cannot pay healthy dividends. Which sector or industry is the business in? The type of the business helps us determine whether a business’s earnings are stable or not.
For example, consumer staples and utilities typically generate very stable earnings because there’s a consistent demand for their needed products and services no matter how the economy is doing.
On the other hand, businesses whose profitability rely on commodity prices can fall hard in price. Many energy companies have cut their dividends in this oil rout.
Look at Crescent Point Energy Corp (TSX:CPG)(NYSE:CPG) and Canadian Oil Sands Ltd (TSX:COS) as examples. In 2015, they slashed dividends by 57% and 86%, respectively. What did you expect? Both are expected to earn negative earnings in fiscal year 2015.
There’s a similar situation with regards to falling earnings for the miners such as Teck Resources Ltd (TSX:TCK.B)(NYSE:TCK) and BHP Billiton plc (ADR) (NYSE:BBL)(NYSE:BHP). Falling earnings have led to falling prices for energy companies and mining companies alike. Read More