Recent turmoil in the stock market may be frightening, but the sell-off could turn out to be a blessing in disguise, especially if you're in or nearing retirement and are worried about generating income from your portfolio.
That's because several key groups of equities, especially the blue-chip financials that have been taking a beating of late, are so depressed that they're offering yields not seen since the end of the bear market. At the same time, other stocks that have always paid rich dividends are becoming more attractively priced.
Over the next several months, therefore, you'll have the chance to construct a safe, diversified retirement portfolio of blue-chip stocks paying out 4 percent in dividends.
Why is this so important? If you've ever used a retirement calculator or gone to a financial planner to figure out how much you can safely withdraw from your nest egg, you know that 4 percent is a kind of magic number.
To avoid the risk of outliving your money, academic research says, you should tap only 4 percent of your portfolio in the first year of retirement, and then increase that amount to keep pace with inflation in subsequent years.
But is it really so difficult to hit that target? Don't blue-chip stocks return around 7 percent a year even after inflation?
Yes, they do. But that's just an average - sometimes the results are better and sometimes they're worse. So creating a portfolio that relies solely on capital appreciation comes with a built-in risk - the danger that if you suffer big stock losses early in your golden years, you'll have to worry about running out of money.
If potential stock market losses are the problem, why not stick with bonds? After all, many investment-grade corporate bonds are paying out more than 5 percent. And some government bond funds are yielding almost that much. You could spend 4 percent, reinvest the remainder and keep your money growing, right? It's not that simple.
There's a reason bonds are called fixed-income investments. Over time, the income a bond portfolio generates won't rise much, which means you won't keep up with inflation.
If you want to put together a portfolio of high yielders, you may be smart to build slowly. The market slump that has pushed share prices down (and yields up) may not be over.
What to do now: In uncertain times it's important to make sure your portfolio is well diversified. The simplest step to take now is to buy the S&P Dividend SPDR, an ETF that spreads its bets among 52 stocks.
What makes this fund so attractive is that it tracks the S&P High Yield Dividend Aristocrats index, an elite group of stocks that have steadily increased their payouts over the past quarter-century. These include blue chips like Consolidated Edison and Coca-Cola.
If a company can boost dividends every year for a generation, it should certainly be strong enough to survive the current market storm.
Integrys Energy Group, which runs electric utilities and distributes natural gas in the Midwest, is yielding 5.2 percent. And Vectren, an electric and gas utility in Indiana and Ohio, is offering 4.5 percent. What to watch for in the coming months: Some of the best long-term opportunities to nudge your yield above 4 percent will be in stocks and other investments that will require a bit more patience.
But keep in mind that battered stocks also offer the greatest opportunity for gains. As long-term values, Katz favors Pfizer among the depressed drug giants and Bank of America among the financials weighed down with shaky loans.
A more conservative way to cash in on financials is through PowerShares Financial Preferred Portfolio. This ETF holds preferred stock in domestic and foreign banks.
Preferreds are like bonds - they're safe and pay high yields. Other industrials, such as DuPont and Leggett & Platt, a mid-size maker of furniture parts, also look attractive once the economy shows signs of picking up.
There's one last group to watch. Real estate investment trusts not only offer growth and fairly high yields, their property holdings also offer long-term protection against inflation.
Only trouble is, property prices could be weak for another year. A diversified fund such as Vanguard REIT Index fund is the safest way to invest in the group, but given current uncertainties, it's smarter to wait and watch.
You're going to be depending on your retirement portfolio for decades. You should be willing to spend a little time fine-tuning your holdings.
