COVID-19 and the Retiree’s Dilemma
The coronavirus pandemic has put nearly a quarter of the nation’s workforce in the unemployment line. In response, the federal government has pumped billions of dollars into programs designed to prop up businesses and keep idled employees on the payroll.
However, little attention has been directed towards retirees. Presumably, they have pensions, Individual Retirement Accounts, and Social Security benefits to keep them going. Although that was once mostly true, that is no longer the case.
A recent study by the National Institute on Retirement Security debunks that myth. It reveals that less than 10% of retired Americans receive income from all three of those sources. Even worse, 40% of them have only Social Security and nothing else.
That means roughly half of all retirees rely on their savings to finance a significant portion of their living expenses. For them, the coronavirus pandemic and its impact on the financial markets is just as much of a threat as it is to working Americans.
A few days ago, one of my Personal Finance readers asked a question that I’m sure is on the minds of many retirees these days: “(I) have a CD coming due (at the) end of May. Rollover rate is 1.35%. I’m not doing the CD. Should I be looking at Utilities or something (else)?”
Central bankers around the world have cut interest rates to keep the global economy awash in cash. That’s great for borrowers, but not for savers. The 10-year Treasury note yields less than 1%. Have fun trying to pay your bills on that type of income in retirement!
In this case, I think my reader is spot on in identifying utilities as a viable alternative for income. Within the universe of equity income stocks, utilities are the safest. Demand for essential services such as electricity and water won’t disappear as a result of the virus. Energy consumption may wane for a while, but it will rebound as soon as the economy opens back up.
It’s too soon to know exactly how severely the recession will affect energy demand. However, it’s a safe bet that utilities primarily serving residential customers will be less affected than those serving industrial and commercial accounts.
All types of investors should have exposure to utility stocks. For convenience and instant diversification, a smart bet is the “one-stop shopping” of an exchange-traded fund (ETF). Appealing right now is the industry benchmark Utilities Select Sector SPDR Fund (XLU).
This fund has nearly $12 billion in net assets and owns shares of 29 utilities. Its top three holdings are NextEra Energy (NYSE: NEE), Dominion Energy (NYSE: D), and Duke Energy (NYSE: DUK). XLU’s top 10 holdings account for 64% of the portfolio’s total assets.
Through the end of April, XLU was down 10.5% this year compared to a 9.2% drop in the SPDR S&P 500 ETF Trust (SPY). However, that comparison is misleading since the S&P 500 is a cap-weighted index. The Invesco S&P 500 Equal Weight ETF (RSP) has lost 16.1% over the first four months of this year.
Not only have utility stocks performed better than the average S&P 500 constituent but its yield is higher, too. At a recent share price of $56, XLU’s quarterly dividend of $0.475 works to an annual yield of 3.4% compared to 2.3% for RSP.
Up in Smoke
If a dividend yield of 3.4% is insufficient, then consider splitting your money between an ETF and some higher-yielding stocks. Earlier this week, my colleague Robert Rapier discussed some of the more appealing choices among individual dividend stocks.
Robert is the chief investment strategist of Utility Forecaster. In addition to the companies he mentioned, I would include cigarette manufacturer Altria (NYSE: MO) as a relatively safe dividend payer. Altria recently released Q1 results that exceeded expectations. Altria’s first-quarter revenues jumped 13% compared to a year ago. Cigarette sales are up during the coronavirus lockdown. People are feeling anxious and want some relief.
At a recent share price of $37, MO pays a forward annual dividend yield of 9.2%. The company reiterated its commitment to paying the highest dividend possible as its top priority. In that regard, a company like Altria is the exception to the rule. This is another case where owning a fund may be preferable.
For example, the ALPS Sector Dividend Dogs ETF (SDOG) owns the five highest-yielding stocks in each of the GICS sectors that comprise the S&P 500. That way, your money is spread evenly across dozens of companies, which means no single holding can exert an outsized impact on the portfolio’s performance.
Editor’s Note: Jim Pearce just explained why dividend stocks, particularly those in the utilities sector, belong in every retirement portfolio.
You should know that in a sharp and prolonged downturn, such as the one we witnessed during the 2007-2009 Great Recession, utilities typically do a superb job of retaining their value relative to the overall market.
Consider this: investors in growth stocks suffered losses of between 40% and 60% in 2008, while the average portfolio of Utility Forecaster (an Investing Daily publication) was down only 18.2%, according to data from The Hulbert Financial Digest.
Throughout the savage 2008 downturn, utility stock investors enjoyed reduced losses and a steady stream of dividends. To pinpoint utility stocks with the highest and safest yields right now, consult our “dividend map” by clicking here.