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].