In my next life I want to be an economist or research professional because they can say whatever they want without being directly accountable to clients. They can just revise their forecast or move onto another project without the consequences that we advisors suffer -- including the client's loss of income. Same goes for investment theorists, think tanks and companies that sell packaged investment products.  Their information makes for good sound bites on TV and fills white space in magazines, but as far as applying it to daily investment activity it's about as valuable as a wooden penny.

Take for example a recent report from Putnam Investments and the Government Accounting Office. It suggests that retirees should have between 5 percent and 25 percent of their retirement savings in equities, and that Americans can avoid the risk of outliving their assets by saving more, working longer, investing wisely, delaying Social Security and buying an annuity. Wow! What powerful insight. That's like saying that if you eat less and exercise every day that you'll be healthier! Good luck on actually doing it, but if you do it should work out.

In fact, there's a major difference between the micro, macro and behavioral economics upon which many economists and researchers base their pronouncements compared with what I call "actual economics," which is what advisors confront every day. We have to pick up the phone, call a client, explain why an asset allocation failed and his bond fund lost 30%, and actually convert all those grand theories into practices and steps that the client can both feel comfortable with and understand.

It follows, then, that financial advisors need to develop specific strategies to help clients understand the retirement income environment we're in now and accept emerging strategies that will help them achieve the income they need in the future. Here are two equity-based retirement income strategies that are more than theory; they're actual programs that I use with clients to take advantage of the current interest environment while providing comfort in the form of familiar concepts.

Laddered Dividends

One of my favorite things is to ask clients to tell me the highest interest rate they ever received on a money market or CD. Of course the double-digit yields during the interest-rate heyday of the 1970s always come up, which caused retirees and conservative investors to abandon traditional tools for generating retirement income, such as laddered CDs. My suggestion, though, is to take that strategy and give it a contemporary spin.

The concept of laddered CDs is pretty simple. Buy a series of CDs that mature at different times -- typically one to five years -- and live off the interest income. Once the first CD matures, reinvest the principal into another 5-year CD, striking a balance between short- and intermediate-term interest rates. This approach creates a consistent and reliable income stream throughout the retiree's golden years.

Many clients and professionals are surprised to learn that you can build a similar laddering strategy with dividend-paying stocks. Like CDs, many blue-chip companies pay their dividends at different times, including quarterly and annually, as well as in different months of the year. By strategically buying stocks with sequential dividend payments, investors can generate consistent income well above current CD rates. Consider the following three companies:

Kimberly Clark (KMB) -- Quarterly dividend payable in Jan., Apr., July, Oct.
Proctor & Gamble (PG) -- Quarterly dividend payable in Feb., May, Aug., Nov.
Johnson & Johnson (JNJ) -- Quarterly dividend payable in Mar., June, Sept., Dec.

 

 Jan.  Feb.  March  April  May  June  July  Aug.  Sept. Oct.
Nov.
Dec.
 KMB PG
 JNJ  KMB  PG  JNJ  KMB  PG  JNJ  KMB  PG  JNJ

Assuming each company maintains their dividend and payment date, they combine to provide a monthly paycheck throughout the year without the need to shop for new rates at maturity. Additionally, this strategy offers the potential for capital appreciation over time and, depending on future tax law, the option to pass along your interest in these companies to your heirs or charity on a tax favorable/step-up basis.

There is obviously more risk associated with individual stocks than with CDs, not to mention much more work and research required on a financial advisor's part compared with simply selling a packaged-income product like a mutual fund or ETF. Turning your client's money over to a mutual fund company or ETF that offers income still requires one to consider the consistency of dividend payments. Mutual fund and ETF dividend payments can vary widely from month to month or quarter to quarter. Contrast that with dividend payments from individual companies, which generally remain the same no matter what the value of the underlying stock.

Another, often unnoticed benefit of laddering an income stream around blue-chip companies with long histories of consistent dividend payments and annual increases is some built-in protection against inflation.

Barbell Dividends

Investors seeking retirement income also might want to consider a variation on the traditional fixed-income barbell strategy.

A basic barbell strategy involves buying a series of short-term and long-term bonds. By buying bonds with maturities at opposite ends of the spectrum, investors historically have been able to create a comfortable amount of interest income from the long end of the yield curve while using the maturities at the short end for quick cash, which can then be reinvested when interest rates are rising.

Obviously this fixed-income strategy isn't going to work any time soon because the Federal Reserve isn't planning on raising interest rates until maybe mid-2013. A better option to generate retirement income might be for investors to use a barbell dividend strategy that capitalizes on the rising wealth gap in the United States.

The old cliché, "The rich get richer and poor get poorer," seems truer than ever. The U.S. Census Bureau recently reported that the number of Americans living below the poverty line rose to a record 46 million last year. That's the third straight annual increase and represents the largest number of Americans designated as poor in 52 years of reporting.

At the other end of the spectrum, the average CEO's salary at the 200 largest American companies rose 20 percent in 2010 to $11.7 million, with CEO bonuses at 50 major corporations rising 30.5 percent, representing an average bonus of $2.5 million.

The easiest way to play the growing wealth gap is through the retail sector, where various companies selectively target the wealthy, the middle class or the working poor. Obviously as the rich get richer we can expect stores like Coach (COH), Tiffany's (TIF) and Nordstrom's (JWN) to do well. At the low end of the income strata, the increasing number of poor will likely shop at Wal-Mart (WMT), TJX Companies (TJX) and Family Dollar (FDO) type stores. The middle class, previously supported by rising income and home equity loans, will continue to see their purchasing power stagnate and that will mean they'll be less likely to impulsively spend at stores like Target (TGT), Best Buy (BBY), and Kohl's (KOH). Building a barbell dividend strategy with the wealth gap in mind could look like this:

 Budget Dividend    Luxury Dividend
 WMT: 2.60%
  JWN: 1.80%
 TJX: 1.30%   TIF:
1.60%
 FDO: 1.30%   COH: 1.45%

While the individual and average dividend yields from these companies won't have you eating lobster every night or buying NetJet gift certificates for family and friends, they should out-yield the average rates for one- and two-year CDs and are competitive with 10-year Treasury yields of late.

Clients need to be well aware of the tradeoffs. Obviously, by using stocks in both strategies it's possible they could lose their entire investment in a company if it goes bankrupt and, as with any investment, advisors and investors alike need to regularly do their homework. They still need to monitor things like the company's payout ratio and free cash flow (among other things) to make sure their dividends keep coming and that the weights on each end of the barbell don't fall off.

Right now, Euro zone concerns, a divided and dysfunctional Congress, high unemployment and extreme income dispersion, not to mention an ultra-low interest rate environment, are the "actual" economics that advisors are faced with each and every day. These economic realities are forcing financial advisors to adapt and consider other methods such as laddered and barbell dividends to help clients feel comfortable and generate the income they need.

Robert Laura is the president of SYNEGOS Financial group, co-founder of RetirementProject.org, creator of the Laddered Dividend Portfolio, and author of Naked Retirement. He can be reached at [email protected].