A basketful of economic uncertainty leaves planners scrambling.

    It's worth recalling from Aesop's story that when the couple sat down to slaughter their goose that laid golden eggs, they were hoping their fecund fowl might have golden guts, too. Turns out it didn't. With no eggs left, what then? Eat the principal?
    Many retirees today worry about the inevitability of having to do exactly that, since they're in a market with less income to crack open. After all, the ten-year bond is at 4.76% and stocks are volatile, and, in some people's minds, the economy may be even ready for another recession. These bare trees make it difficult to juice the market for the 4% to 5% in income retirees expect from their portfolios to live happily ever.
    No one scoffed at the idea of eating into principal in the 1990s, when the portfolios were practically sweating double-digit returns. But now that game has changed.
    "Maybe six or seven years ago you had a line of thinking that people should just go for the gold and manufacture income by redeeming whatever percentage you need to live on each year-somewhere between 5% to 10%-and the appreciation of the growth portfolio would take care of the income needs," says Brian McMahon, president and CIO of Thornburg Investment Management in Santa Fe, N.M. "Of course, what happened between 2000 and 2002 is that if you had a $100,000 portfolio, it got cut to $60,000 or $70,000. Maybe it's down to $50,000. Anybody who lived through that realized in short order that it was not a viable plan."
    Though the stock market is up again since the bear market, planners continue to worry about political instability, higher energy costs, another possible recession and higher inflation. The outlook is gloomy to many who have retirees to think about, especially considering the longer life expectancies of the baby boomers who will have to stretch out those savings over many more years while facing higher costs for health care. A quick read of the tea leaves suggests that even a modest 5% harvest will not be enough for most Americans.
    "The practical reality in managing those portfolios every day is that the retirees have other things coming up," says Daniel Genter, president of RNC Genter Capital Management in Los Angeles. "They don't plan for taxes, don't plan properly for other medical expenses and don't plan for any cadre of things such as children and grandchildren always nipping at them for assets. It's uncommon to look into an account and see that 5% is the only money they took out."
    With fewer golden eggs, the challenge has been thrown back on advisors to be more adept, often more aggressive and definitely more innovative with their portfolios. "If you had a portfolio six months ago and you let it alone, it would be way down," says J. Graydon Coghlan of Coghlan Financial Group in San Diego.

Looking For Juice
    One predictable result of the yield crisis is a renewed interest in dividends, which according to studies are once again starting to show some star power with both planners and clients.
    "In the 1990s, growth got fashionable and dividends got unfashionable with both payors and payees," says McMahon. "They said, 'Don't give me dividends, give me growth.' Now the pendulum has begun to swing back the other way. Not fast, but it has."
    According to Standard & Poor's, the number of companies paying dividends in the S&P 500 index has risen from 350 in January 2003 to 385 in August 2006 (though the number is still far below its level of 469 in 1980). The '90s were dog years for many of these stocks, but their lower volatility has today made them more attractive for investors in an uncertain market, says Howard Silverblatt, senior index analyst at S&P.
    The need for yield also has a lot of people thinking differently about asset allocation. It's not that the basic principles of portfolio management have been scuttled, but there is a bigger push for more tactical asset management on top of that. Some are knuckling down, doing the hard work involved in picking individual stocks with high yields. A number of others are bringing new tools into play: hedge strategies, commodity plays, master limited partnerships, royalty trusts, floating-rate bonds, international real estate, nontraded real estate and private equity, among other things.
    One advisor, David Carter of Carter Asset Management Inc. in Abilene, Texas, has witnessed the despair among colleagues about the income situation, yet he believes the yield is there for those willing to look for it. With 65% to 75% of his clients in retirement, there's a lot of money pumping out of his spigot every month.
    He leads the inquisitive to the Yahoo! Finance Web site, where he points out a variety of different funds and individual stocks bearing high yields, the kinds of things he adds to his quiver of traditional mutual funds. Among the funds he keeps on a short list are the Eaton Vance Floating-Rate Income Trust, which had a cash yield of 8.9% at the end of August; the Royce Value Trust, which invests in small-cap stocks and yielded 8.70%; and the Cohen & Steers REIT fund, which yielded 8.10%.
    He also has a finite list of stock picks that includes Provident Energy Trust, an open-ended income trust whose subsidiary acquires and develops crude oil and markets and stores natural gas liquids. The company yielded 9.80% at the end of August. Another pick is Citizens Communication Co., which provides communications services to rural areas and small and medium-sized towns and cities as an incumbent local exchange carrier. Yet another is Tortoise Energy Corp., which invests in master limited partnerships related to energy. These last two companies yielded 7.30% and 6.40%, respectively. Thornburg Mortgage Inc., a mortgage REIT, meanwhile, yielded 11.8%.
    "There are people who would argue with me about some of these positions," Carter says. "They may think they are ill-timed or have more risk exposure for a retirement portfolio. But I've been working with these for years and years. This isn't some Johnny-come-lately idea, where I was sorting for yield and not looking at underlying fundamentals."

Dividends Making A Comeback
    Dividends have become attractive for several reasons. One of the most important is that the taxes on them were sliced to 15% with the Jobs and Growth Tax Relief Reconciliation Act of 2003, which brought them in line with capital gains taxes. Before that they were taxed as regular income and could be as high 35%.
    Genter, whose firm invests for institutions and high-net-worth individuals, says his firm's portfolio seeks double the cash flow from dividends in an S&P portfolio. "The S&P gets 1.8% and we get 3.5%," he says. "Cash flow is double the S&P, and yet you're still only taxed on 15%, so net after tax is just about the same as that on the taxable money market fund or CDs. That's cash flow, not appreciation. So you also have the upside potential of market appreciation."
    Genter also points out studies that say a higher percent of total return is going to come from dividends. The icing on the cake, he says, is that high-dividend-bearing stocks have happened to be outperforming the market as a whole recently. As of Aug. 31, 2006, the S&P 500 Index total return (which includes dividend payments), was up 5.799% for the year, while the return on the Dow Jones U.S. Select Dividend Total Return Index, which comprises the 100 highest-dividend-paying securities, is up 9.59% for the year, according to Morningstar Inc.
    These companies are usually value plays, and not necessarily sexy. Their earnings are not as high as those of a tech company. But they are predictable and much less cyclical. And more important for retirees, they put money in the bank.
    The trick to finding the good picks, dividend mavens say, is to find out which companies are really dedicated to paying their shareholders back and not hoarding the money. One of these gimlet-eyed company watchers is asset manager McMahon. His Thornburg Investment Income Builder fund, which focuses on high-dividend-yielding stocks, has built a cult following, mostly among planners, since its 2002 inception, growing to $1.6 billion. The fund is interested in companies that pay a good dividend today, promise a rising dividend in the future and have the goods to deliver.
    Of course there are skeptics. Those who are more wary say that companies paying high dividends are often depressed and will likely get more depressed-their dividend strategy a sign that they have too much cash sitting around and too few ideas about what to do with it. They also say that chasing such dividends is a good way to lose your shirt. But McMahon believes that this is just an alibi for companies that hoard earnings. He says the highest divided payout ratios subsequently grow the most because it's a sign of capital discipline.
    "If you go back over the last five years," McMahon says, "and just looked at the highest-paying companies, you would end up with Kodak and General Motors and things like that which had the price beaten up. The ability to earn the dividend they were paying deteriorated a lot. ... The people who have smarted from dividend cuts, all they know is to look down the pages of The Wall Street Journal and look at what the highest dividend is. I don't think that's the smartest thing to do. It will lead you to a lot of companies that are getting ready to decrease their dividend."

    Another planner singing the song of innovation is J. Michael Martin of Financial Advantage Inc. in Columbia, Md. His firm avoids the broad indexes and employs a mix of deep-focus value funds, a small number of individual stocks, short-to-medium high-quality bond funds and huge cash reserves. He balances these out with some hedges-such as an ETF fund called StreetTracks Gold Shares ("An indirect way to own gold bullion and not mining company stocks," he says)-and a Rydex fund called Rydex Inverse Dynamic OTC that shorts the Nasdaq 100, "doing the exact opposite of the Nasdaq times two."
    "We believe the market is signaling a tremendous amount of risk," Martin says. "Geopolitical and business cycle risk. We think the business cycle is ready to roll over because of consumer issues, which is mostly housing issues."
    Sooner or later, he says, he believes these risks will catch up with the market, "and that it will slap its head." The Rydex fund is just a way of addressing an expensive market where it is most vulnerable-in technology.
    "If you look at the market and you think it's expensive, and you see risks that are not in the price, you can do something about it or do nothing-and say the market is the market. I agree that in the short-term you can't figure it out. But you can say whether it is cheap or expensive."
The firm also has an outsize position in energy, he says, because the market is currently behaving as if the increases in the price of oil are temporary, and he doesn't think they are. Michael Ling, a CFP licensee with Berkeley Inc. in Boise, Idaho, has gradually shifted away from a 12% to 15% position     in REITS three years ago to two newer strategies: royalty trusts and master limited partnerships.
"A couple of years ago it became difficult to find something of good value and we started investing in royalty trusts," Ling says. "In this country, anyway, they are attached to natural resources-energy. We didn't necessarily anticipate that oil prices would do what they've done, but it's been fortuitous in that regard. We still like royalty trusts, but that can be volatile." Though the name "limited partnerships" can give some people the shivers, he says the MLPs are one of the few asset classes almost negatively correlated with large-cap U.S. equities.
    Zach Ivey, a planner with First Financial Group of the South Inc., says his firm adds to its diversified portfolio of mutual funds, ETFs and bonds another alternative class-nontraded REITS. Nontraded real estate has been criticized for its lack of liquidity and unattractive pricing, but Ivey says that it offers several attractive features, the most obvious being steady income of 6% to 8%.
"You have something that appears to be noncorrelated," he says. "It's not trading on a market, so it is not subject to the whims of market real estate. Traded real estate trades more like small-cap stocks."
    Others have poked their noses into international real estate to round off their portfolios, and many are betting on commodities. "We think we're in a long-term bull market for commodities," says Lou Stanosolovich, president of Legend Financial Advisors Inc. in Pittsburgh. "While they've run up over the last four or five years pretty heavily, we think, at least as we are doing our readings, that we see more instances. Take industrial metals. It takes an enormous amount of money in a very long period of time even in Third World countries to open a metals mine. ... As a result, we're seeing greater demand for industrial metals."
    Though he says an economic slowdown could hurt price appreciation, it doesn't take away from the fact that supplies are dwindling, and that oil and gas are in the same situation.

Could We All Be Right?
    In the end, none of these strategies is any more right than the other, and these planners stress that the most important thing to ask is, "Is it right for the client?"
    "There are so many talented advisors," says Keith Newcomb of Full Life Financial in Nashville. "The global fact set is the same, but different advisors, talented in their own right, are implementing different global strategies with the same fact set."
    "I think it's a mistake generally to get focused on the current market environment and lose sight of the longer term," says Dan Moisand of Spraker, Fitzgerald, Tamayo & Moisand LLC of Melbourne, Fla.
    A person in good health today, he says, is going to have a long retirement to look forward to, and however you slice it, will want to have a good chunk of that money in equities to stay ahead of inflation and taxes. And you don't get extra yield without taking on extra risk. The main thing is to articulate these ideas to clients and assuage their fears.
    "When the markets were bad, we were counseling clients not to think we're stupid," says Moisand with a laugh. "Now that the markets are good and they're too excited, we're counseling them and trying to tell them that we're not all that smart."