Image source: Getty Images
The best retirement accounts have a well-diversified portfolio of stocks and bonds that focus on two goals: providing a steady stream of income and minimizing unnecessary volatility. We want to ensure safety of principal and a perpetual withdrawal rate, lest we run out of money in the middle of our golden years.
What kinds of stocks do we want?
Regarding the equity component of our portfolio, our main objectives should be to find it with
- A constant streak of +15 years of dividend payments and increases (âDividend Aristocratsâ);
- High dividend yields of 3% or more, but with a sustainable payout ratio between 35% and 65%;
- A low beta. A beta greater than one suggests the stock is more volatile than the broader market, while a beta less than one indicates a stock with lower volatility. A beta less than zero indicates an inverse relationship.
Stocks with all three of these characteristics will help your portfolio create a steady stream of income, while minimizing the ups and downs that could impact your ability to withdraw money. When the market fluctuates wildly, your portfolio will be much more stable and dividends will allow you to earn income without selling too many stocks.
What are some examples of these actions?
The Canadian market is full of stocks that exhibit these characteristics, mainly concentrated in the utilities and telecommunications sector. Here are my top three picks:
- Fortis (TSX: FTS) (NYSE: FTS): Dividend yield of 3.51%. Beta of 0.08
- Emera (TSX: EMA): Dividend yield of 4.23%. Beta of 0.24
- Bell (TSX: BCE) (NYSE: BCE): Dividend yield of 5.26%. Beta of 0.33
While these stocks are not crash proof, they tend to follow the market less during times of turbulence. In addition, the three companies have an excellent financial position, competent management and good competitive advantages, which makes them suitable for long-term holdings.
What are the risks here?
There is no free meal in the investment. Each strategy, stock or portfolio will have its own risk profile, and these three stocks are no different.
- Market risk: Despite their low beta, these stocks could still temporarily collapse alongside the market as investors panic by selling risky stocks and turning to bonds, even though they have excellent fundamentals at that. moment.
- Interest rate risk: Utilities like FTS and EMA could be adversely affected by rising interest rates as bonds become more attractive and their debt becomes more difficult to repay.
- Regulatory risk: Telecoms like BCE that operate in an oligopoly run the risk of being limited by anti-competitive legislation or policy.
Madness to take away
Low volatility dividend aristocrats like FTS, EMA, and BCE are best suited for retirees with low tolerance for risk. These investors cannot tolerate volatility so much and depend on a secure nest egg and a stable income to meet their living expenses. Younger, growth-oriented investors should look for more volatile stocks with a higher beta for better returns.