The Money Class (37 page)

See why I think dividend stocks yielding 3% to 5% or more can be a smart part of your retirement portfolio?

The Protection of a Stop-Loss Order

For those of you who are interested in owning dividend-paying stocks but are also worried about downside volatility, I recommend you learn how to place a stop-loss order on an investment. With a stop-loss order, you instruct your discount brokerage to sell any stock once it hits your designated price. So, for example, if you bought an ETF at $35 a share but can’t bear the thought of your principal investment losing more than 15%, you could place a stop-loss order on your account that directs the brokerage to sell your shares if the ETF price falls to $29.75. But please know that in a volatile market there is no guarantee you will be cashed out at exactly $29.75. With a stop-loss order you are basically telling your brokerage to get you the best market price once it hits your target.

HOW MUCH TO INVEST IN DIVIDEND-PAYING ETFS

Here are my recommendations:

•
Determine how much of your portfolio you can comfortably devote to the stock market
. I know I am repeating what I said above, but this is so important I want to make sure you hear me loud and clear: No stock investment, even an ETF portfolio of dividend payers, is to be mistaken for a cash investment, or a bond investment. You are to only invest money in dividend-paying ETFs that you will not need to tap for at least 10 years.

•
Diversify
. There are two ways to invest in dividend-paying stocks. You can do it via ETFs that focus on dividend payers, or you can build your own portfolio of individual stocks that pay dividends. If you want to own individual stocks your portfolio should have a minimum of 10 to 12 stocks. It is never smart to have a larger portion of your retirement funds invested in one stock. No matter how stable that stock looks, we can never be sure of its future. If the money you want to devote to stocks is not enough to buy that many individual shares, then I recommend you focus on dividend-paying ETFs.

HOW TO CHOOSE A DIVIDEND-FOCUSED EXCHANGE-TRADED FUND

If you choose to invest in a diversified portfolio of stocks through an ETF, there are in fact many good options to choose from. ETFs tend to have lower expenses than many no-load mutual funds. And many brokerage firms are allowing you to buy and sell certain ETFs for free. As of late 2010, firms that were waiving their commission on certain ETFs included Fidelity, Schwab, TD Ameritrade, and Vanguard.

ETF Fees:
All ETFs, like mutual funds, have an expense ratio (the annual charge for administrative and management costs). It is expressed as a percentage. The average expense ratio for a stock mutual fund is about 1%, but some funds charge 1.5% or higher. Every penny that goes to pay the expense ratio is money you lose. And expenses are the one factor that is entirely within your control. You are the one who decides if you will pay high expenses or low expenses. In today’s world, where you want to earn as much as possible on your investments, focusing on minimizing the expenses you pay becomes crucial.

Below are some ETFs you might consider for your portfolio. They all focus on dividend-paying stocks and have low expense ratios.

TIPS FOR OWNING INDIVIDUAL DIVIDEND-PAYING STOCKS

If you are interested in building a portfolio of individual dividend stocks rather than purchasing an ETF that holds a basket of dividend payers, make sure you follow a few key steps in putting together a strong portfolio:

•
Avoid the highest yielding stocks
. As I write this in early 2011, the yield of the S&P 500 stock index, considered a solid benchmark of “the market,” is 1.8%. That average yield includes some firms that have lower yields and others with higher yields. For example, the utility and telecommunications sectors have mature companies that tend to offer higher dividend yields; the average payout right now for those two sectors is 4.3% for utilities and 5.5% for telecom stocks.

Those are good benchmarks to keep in mind when investing in dividend stocks. When you see a dividend yield of 8%, 10%, or higher, that should be a big warning signal. When a stock yield is that high it is a sign that the company may be in trouble and unable to continue to make its dividend payout. It’s important to remember how a dividend yield is calculated: dividend/price. A $1 dividend on a $30 stock is a 3.3% yield. But let’s say that company runs into a big problem and its stock price falls to $10. Its yield is now 10% ($1/$10). Not because the dividend grew but because the stock price has taken a huge plunge. (Note: You will be averaging only 3.3% if you bought it at $30, but new investors will be getting 10%.)

My recommendation is to avoid the highest-yielding stocks. Stick to solid blue-chip firms that have a long history of making dividend payments. They will typically yield anywhere from 2% to 6% or so, depending on their industry.

Stock Tip:
Standard & Poor’s maintains a Dividend Aristocrats index of firms that have managed to increase their dividend payouts for at least 25 years. It’s a good resource for anyone looking for investments to research. As of early 2011 the Aristocrats included:

3M

Aflac

Abbott Laboratories

Air Products & Chemicals, Inc.

Archer Daniels Midland

Automatic Data Processing

Bard, C. R.

Becton, Dickinson & Co.

Bemis

Brown-Forman

CenturyLink

Chubb

Cincinnati Financial

Cintas

Clorox

Coca-Cola

Consolidated Edison

Dover

Emerson Electric

Exxon Mobil

Family Dollar Stores

Grainger, W. W.

Integrys Energy Group

Johnson & Johnson

Kimberly-Clark

Leggett & Platt

Lilly, Eli

Lowe’s

McDonald’s

McGraw-Hill

PepsiCo

PitneyBowes

PPG

Procter & Gamble

Sherwin-Williams

Sigma-Aldrich

Stanley Black & Decker

Supervalu

Target

VF

Walgreen

Wal-Mart Stores

•
Diversify among different types of businesses
. You want to build a portfolio that owns a mix of stocks that operate in different fields. For example, make sure you don’t own all energy stocks, or all consumer stocks.

•
Buy at the right time
. There is one tricky aspect of investing in dividend stocks. Every company that pays a dividend chooses a date at which all shareholders as of that date will be entitled to the next dividend payout. For example, let’s say XYZ declares a dividend on September 15, with an ex-dividend date of October 15 and a payment date of October 31.

The most important date to pay attention to is the ex-dividend date. This is the cutoff date for receiving the dividend; if you buy the stock on October 16 you will not be entitled to the dividend. The actual dividend payment will be made on October 31.

You want to purchase your shares before an ex-dividend date to be eligible for the upcoming dividend. When you are considering selling shares of a dividend stock, if you wait until the ex-dividend date you can sell at any time between that date and the payment date and you will still receive the dividend. Just know that when it comes to buying and selling a dividend paying company, they reduce the price of the stock by the amount of the dividend so in the end it all comes out about the same.

One of the sources that I use to pick good quality dividend stocks for my own portfolio is the newsletter published by
Dividend.com
. Founder Paul Rubillo writes a newsletter that is full of great information and is easy to understand. Not only does Paul offer tips on what to buy, but he also shares his insights on when a stock should be sold as well.

WHERE TO FIND MORE INCOME

Retirees in need of more income may want to consider a reverse mortgage. A detailed lesson on reverse mortgages is in the Home Class, but I ask that you carefully consider the often high costs and risks involved.

No Free Lunch

During your retirement years you may be invited to many luncheons where a financial advisor will present you with what he believes is the answer to your retirement needs. Please be careful. All too often, what is pitched to you as a great solution to your income shortage is in fact an inappropriate and expensive investment you should never make.

My quick list of investments to avoid:

• A whole-life insurance policy
  
• A variable life insurance policy
  
• A variable annuity
  
• A universal life insurance policy
  
• A mutual fund that charges a load (sales commission)
  
• An immediate annuity (only as long as interest rates are low)
  

LESSON 6.
DOUBLE-CHECK YOUR BENEFICIARIES AND MUST-HAVE DOCUMENTS

It may be years, if not decades, since you first opened your retirement accounts or purchased a life insurance policy. That is a long time for any number of life-changing events to have occurred. Marriage. Divorce. The death of a spouse. A remarriage. Children from a remarriage. Stepchildren. Grandchildren. Stepgrandchildren. A part of your legacy is to make sure you have updated your beneficiary statements to reflect your most current wishes. Please don’t leave this to memory. If you are not sure, go back and check.

I also want you to pull out your must-have life documents and make sure they are also up to date. If you have any doubt as to whether you have all the documents you must have in my opinion, then please consult the Family Class, where I run them down in detail.

The good news is that any estate planning—such as trusts—you have reviewed with your estate-planning attorney sometime in the past few years is likely in good shape. In late 2010 Congress voted in increases in the estate tax exemption. The current law, good through 2012, exempts the first $5 million ($10 million for married couples) from estate tax, and the tax rate on sums above that amount is 35%.

LESSON RECAP

Now that you have made it through this retirement class I hope you are feeling more confident about how you can best navigate what you and I both know are very challenging times for retirees. But as we discussed in “Stand in Your Truth,” sometimes the most powerful action we can take is to be willing to change our perspective. Instead of becoming stuck in frustration and fear over what you have lost, or how much harder it has become, please stand in this truth: With the right perspective, I am confident you can make the necessary changes to keep your retirement dream alive and well.

• Recognize that even once you retire, you still have 20+ years that you need your money to last.
  
• Make sure that at the rate you are withdrawing money, your savings will last your lifetime; a 4% annual rate is a good rule of thumb.
  
• Protect yourself from a future in which interest rates will likely rise: Do not invest in long-term bonds or bond funds.
  
• Consider dividend-paying ETFs or stocks for a portion of your portfolio; many currently pay double the income yield of bonds.
  

CLASS

THE ULTIMATE LESSON

I have a confession to make.
The Money Class
has been the most difficult book for me to write. For months I struggled to come to terms with just why I was having such a hard time with it, and that in itself was quite a jolt. After all, this is my tenth book; I wasn’t exactly suffering from a case of first-time jitters. Eventually what I realized is that I myself was having some trouble coming to terms with the very strong, sobering message of the book. I came to understand that I needed to dig deep before I could start to tell you how to dig deep.

I want to share with you the process I went through in overcoming my personal roadblocks in writing this book. I offer this last lesson to you in the spirit of shared experience. I know that your journey has yet to begin; you end this book at a starting point. It’s now time for you to find the strength and resolve to put the lessons of
The Money Class
into action. It is my hope that in sharing the process I went through to bring this book to life I can provide added motivation for you.

I never wavered in my enthusiasm for this project. When I approached my publisher a year ago to discuss the idea for the book I was eager to get rolling. When I wrote
Suze Orman’s 2009 Action Plan
during the height of the financial crisis in the fall of 2008, I saw myself as an emergency room doctor; I needed to act fast to get you out of harm’s way. The message for that time was about survival, in the short term. How to get through. But I knew even then that I would soon want to follow up that crisis management book with a more expansive discussion of how to move forward once the worst of the crisis was past. To use the hospital analogy just one more time: Once you make it out of the ER and ICU, the next phase is often long-term rehabilitation, which takes a more holistic approach to how to live the best—most healthy—life going forward.

The Money Class
is that long-term rehabilitation plan. The focus and intent of this book have not changed conceptually from those early planning days. But I soon became bogged down in the enormousness of what I was going to ask you. The financial advice wasn’t the problem. I knew exactly what I needed to teach you. But I began to realize that the overriding message of the book was anything but easy to digest. The death of the American Dream as we know it is not exactly the sort of uplifting, inspirational message that has always been the powerful undercurrent propelling my financial advice.

I was always clear that the New American Dream was the right message. I knew that if you agreed with the premise—that the new realities of life in these times require a reimagining of the dream—and followed my advice you would begin to shed your anxieties and fears and build a life defined by calm and confidence. But what slowed me down was that I was well aware of how incredibly difficult it was going to be for many of you to get from here (old, broken dream) to there (new, realistic dream). The attitude reform and the specific measures I was going to ask you to take were more drastic than anything I had ever suggested before. We are long past the days when trimming the cable bill and stretching out the time between haircuts was enough. As you now know,
The Money Class
asks you to contemplate far more life-altering changes.

Granted, I am not exactly shy when it comes to telling the truth. As my friends who work on
The Oprah Winfrey Show
like to say, I am not afraid to deliver a Suze Smackdown when necessary. But it’s all in the service of what I see as my mission: To help you be the best you can be. To help you to live the life you not only want to live, but deserve to live. Am I direct and honest? Guilty. Do I react passionately? I sure do. But I think you appreciate that it is done with the best intentions: to help you fix what isn’t working, quit habits that aren’t empowering, and gain the confidence to know how to move forward toward a better life. In
The Courage to Be Rich
I wrote of how to create a life of material and spiritual abundance. More recently,
Women & Money
was about creating the power to own your destiny. Abundance. Destiny. Such powerful words. And if you’ve read those books you know the power I place on the words we choose: Your thoughts, your words, your actions—all must be in harmony.

Yet here I was, sitting at my computer, writing a book that pronounced the American Dream dead. Not exactly a fabulous truth to share. I worried that the power of those words would be crippling to the traits I prize so very much and rely on to power us through: optimism, courage, hopefulness, clarity. I worried that the message I had to deliver would affect your very ability to dream.

My breakthrough came when I finally reminded myself to take the advice I dispense early in this book. I had to change my perspective. Yes, I was telling you that an outmoded version of the American Dream was over and that its demise—no matter how good for us in the long term—would create a period of difficult transition. But the real message I had for you was not about that death, but about the rebirth each and every one of you can experience once you let go of the dreams that are broken.

I came to see that the New American Dream I am asking you to embrace and build for yourself and your family is in fact my most inspirational message ever. The steps I have laid out for you in this book, the truths that I have presented, and the truth I am asking each of you to locate within yourself will propel you into a future that is so much more hopeful and enjoyable than what I know many of you feel right now.

Will the transition be difficult, will it test your strength and commitment? Yes. I am not going to sit here and pretend that walking away from a home is easy, or that accepting a job that pays 15% less than your previous job is a snap. The road ahead no doubt has its bumps, potholes, and pitfalls. But navigate it you will. I have to ask you: What is the alternative? Do nothing, change nothing, and you will get nowhere. Commit to making change and you have the power to get it right once and for all.

I hope you are spared the months of angst I went through and can, right here, right now—as you read these words—train your perspective on what you are moving
toward
. Take your eyes off the rearview mirror. I ask you to let go—surrender what is no longer relevant to your well-being, so that you can step into that better future.

With time I also came to see that the central message of this book is not in fact hard or beyond your grasp. And that, too, released me from my writer’s block. “Stand in your truth” is my clarion call that you have faith in yourself. To have faith that what you choose to do with your life—the conscious choices you decide to make—is what brings abundance and allows you to control your destiny. And I know that each and every one of us has that ability to turn inward and trust ourselves to take care of ourselves far better than anyone else.

What we collectively experienced over the past two decades has ultimately been a hard lesson learned. And in an odd way, that is why I am so hopeful that you are ready to act on the lessons I have shared in
The Money Class
. We now understand that change is necessary. We are motivated to rethink our ways, because, well, we’re feeling anything but abundant and in control of our destiny.

The authentic, sterling values of old are ready to make their comeback. Our grandparents and great-grandparents had a pretty good handle on standing in their truth, and that is what propelled us individually and as a nation for so many generations. It is time to turn back to them for help in making our way forward. The payoff is not merely a better life today and next year, but a life of lasting integrity and honesty whose effects are far-reaching—for us, our children, our community, and beyond. Most important, we will all be back on track, creating an enduring legacy for future generations. And that, my friends, is the greatest dream of all.