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.
Four U.S. stocks and a Canadian stock increased dividends by 14-27%. They hiked their last dividend in Q4 2015 or Q1 2016. How did they perform as stocks in the past year? Are they good buys now to boost growth for your portfolio?
Last year was a rough ride for anyone who is invested in energy or mining stocks. As a Canadian, I wasn’t spared. It’s my fault really. At one point, I had 30% of my portfolio in energy, thinking that I should be buying more when energy stocks were falling lower. How wrong I was!
I experienced slashed dividends from Kinder Morgan Inc (NYSE:KMI) and Cenovus Energy Inc (TSX:CVE)(NYSE:CVE). The benefit of owning a portfolio of stocks is that winners can cover for the losers. Boy, was I glad I had winners in my portfolio. Some of my winners are listed below.
My Fastest-Growing Dividends
- Amgen, Inc. (NASDAQ:AMGN) increased its dividend by 26.6% from 79 cents to $1 in Q1 2016.
- Starbucks Corporation (NASDAQ:SBUX) increased its dividend by 25% from 16 cents to 20 cents in Q4 2015.
- Mastercard Inc (NYSE:MA) increased its dividend by 18.8% from 16 cents to 19 cents in Q1 2016.
- Microsoft Corporation (NASDAQ:MSFT) increased its dividend by 16.1% from 31 cents to 36 cents in Q4 2015.
- Enbridge Inc (TSX:ENB)(NYSE:ENB) increased its dividend by 14% from C46.5 cents to C53 cents in Q1 2016.
- Buying stocks is a risk and reward game. We try to maximize the rewards and minimize the risks.
- In the first part of the series, I’ll start by discussing the risk of capital loss and volatility risk which come from investing in stocks. And ways to counter those risks.
If I’m not better off investing in a stock, why bother the time, effort, and the cost of capital? I have the opportunity cost of not being able to use that money, while I’m holding that stock.
1. Risk of Capital Loss
Stocks on major exchanges can be bought and sold easily. However, the flip side of this liquidity is that it’s also very easy to sell at a loss. Some make a better investor in real estate because it is less liquid, even though one usually needs to get a mortgage to buy a house because the investment is much bigger.
When investing in a stock, there’s a chance that the company could go bankrupt. However, the odds are in the investor’s favor if he or she invests only in companies whose rewards outweigh the risks. So, the more likely scenario is to sell at a loss emotionally after the price of the stock goes down.
If that happens, then, you need to ask yourself why you sold at a loss. Did you no longer believe in the company you chose? Did something change from the story of when you made your purchase? Or was it due to emotion?
To counter the risk of capital loss:
- Record why you bought the company in the first place.
- If it’s for a short-term trade, decide the holding period and at what price range you plan to sell. Do that ahead of time without emotions.
- Know thyself. That is, know your temperament, risk level, time horizon, experience, and test the waters if you have to.
- Buy at reasonable valuations.
- Have an investing plan and update the plan as you go.