Consistent Income

Quarterly, semi-annual or annual dividends will produce an erratic income each month. Depending on the mix and payment timing of securities in your portfolio, there may not be two months in which you receive the same amount of dividend income. Stocks that pay monthly dividends will help smooth it out some.

Easier to Budget

Retirees living on a limited income may find monthly payments easier to work with. If most of their bills are due on a monthly basis, owning income securities that pays dividends each month makes it easier to balance the budget.

Compounds Faster

For me the most compelling argument for monthly dividends is the compounding effect. Each dollar I receive today can be immediately put to work earning additional income. Given the choice of being paid now or later, most people will choose to be paid now.

The Monthly Dividend Company

Serious about paying monthly dividends? I would say Realty Income Corp. (O) with its registered trademark of “The Monthly Dividend Company” is dead serious about paying monthly dividends. As stated on the company’s website:

Our primary goal is to provide dependable monthly income to our shareholders. We do this by acquiring and owning retail real estate that generates dependable lease revenue which we pass on to our shareholders in the form of monthly dividends.

We have been paying monthly distributions throughout our 41-year operating history. Since becoming a public company and being listed on the New York Stock Exchange in 1994, we have regularly increased the amount of the dividend. Currently the annualized dividend rate is $1.7235 per share. [5.30% yield]

There are not many individual stocks that pay monthly dividends. For monthly income, an investor will need to look at closed-end-funds, exchange traded funds and trusts. Below is a sampling of these:

Monthly Bond Funds

- iShares Barclays 1-3 Year Credit Bond (CSJ) | Yield: 3.73%
- Vanguard Short-Term Bond ETF (BSV) | Yield: 2.74%
- Vanguard Intermediate-Term Bond ETF (BIV) | Yield: 4.32%
- Vanguard Long-Term Bond ETF (BLV) | Yield: 5.16%

Canadian Trusts

- Baytex Energy Trust (BTE) | Yield: 6.2%
- Enerplus Resources Fund (ERF) | Yield: 9.4%
- Pengrowth Energy Trust (PGH) | Yield: 8.5%
- Penn West Energy Trust (PWE) | Yield: 8.8%
- Provident Energy Trust (PVX) | Yield: 11.6%

Special Purpose Funds

- Enerplus Resources Fund (ERF) | Yield: 9.4%
- Eaton Vance Tax-Adv. Global Dividend Oppor. Fund (ETO) | Yield: 7.7%
- The Gabelli Global Utility & Income Trust (GLU) | Yield: 6.3%
- Pimco Global Stocksplus Income Fund (PGP) | Yield: 10.5%
- LMP Real Estate Income Fund Inc. (RIT) | Yield: 8.2%

For some, monthly dividend payments are worth seeking out. Personally, I will buy a security that pays monthly dividends if it meets my criteria and it is the best option available, but I prefer quarterly dividends due to the lower administrative burden. The important question is not how often a stock pays its dividend, but can it sustain and grow the dividend.

Full Disclosure: Long O, CSJ, BSV, BIV, BLV, ETO. See a list of all my income holdings here.

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(Photo: Steve Woods)

A bond is a debt security in which the issuer agrees to repay borrowed money with interest at fixed intervals. Bondholders have a creditor stake in the company. Technically, bonds do not pay dividends, but instead they pay interest. However, bonds are an important allocation for many income investors, thus I chose to include them in this series. There are certain things an informed investor needs to understand before purchasing bonds.

Interest rates play an integral part in determining the current value of a bond. Interest rates and the price of a bond are inversely related. The longer the time until a bond matures, the more susceptible its price is to changes in interest rates. Consider two bonds, one that has a maturity of 30 years and another with a 7 day maturity. If after both bonds are sold, interest rates go up one percent, the price of both bonds will decline since new investors expect to earn the prevailing interest rate. However, the interest rate decline will affect the price of the 30 year bond more than the 7 day bond, due to the longer period of “lost” earnings. It works the same in the other direction – if interest rates drop the bond holder will sell it at higher price which lowers the yield to the market rate.

In summary, longer-term investments have lower rate volatility at the expense of higher price volatility. Therefore, the term of the bond purchased should be dictated by your long-term investment goals. If your goal is capital preservation, short-term is the most appropriate investment. If an investor is willing to hold a bond until it matures and values lower rate volatility, then a longer-term investment will likely better meet this investor’s needs.

Like preferred stocks, many investors choose not to research and buy individual bonds. Instead, they have opted to make their bond investments in funds. Consider the following bond funds:

Vanguard Long-Term Bond ETF (BLV) – Yield: 5.16%
Vanguard Long-Term Bond ETF seeks to track the performance of a market-weighted bond index with a long-term dollar-weighted average maturity. It maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 15 and 30 years.
- Total Assets: $2.9 billion
- Expense Ratio: 0.14%
- Holdings: 40% US Corporate, 39% US Treasury, 8% Foreign Corp, 5% Foreign Govt, 8% Other
- Distributions: Monthly

Vanguard Intermediate-Term Bond ETF (BIV) – Yield 4.32%
The investment seeks to track the performance of a market-weighted bond index with an intermediate-term dollar-weighted average maturity.The fund maintains a dollar-weighted average maturity consistent with that of the index ranging between 5 and 10 years.
- Total Assets: $9.8 billion
- Expense Ratio: 0.14%
- Holdings: 45% US Treasury, 37% US Corporate, 9% Foreign Corp, 5% Foreign Govt, 9% Other
- Distributions: Monthly

Vanguard Short-Term Bond ETF (BSV) – Yield: 2.74%
The investment seeks to track the performance of a market-weighted bond index with a short-term dollar-weighted average maturity. The fund’s dollar-weighted average maturity is not expected to exceed 3 years
- Total Assets: $9.8 billion
- Expense Ratio: 0.14%
- Holdings: 52% US Treasury, 24% US Corporate, 14% US Agency, 8% Foreign Corp, 2% Other
- Distributions: Monthly

Vanguard Total Bond Market ETF (BND) – Yield: 3.98%
The investment seeks to track the performance of a broad, market-weighted bond index. The fund maintains a dollar-weighted average maturity consistent with that of the index, ranging between 5 and 10 years.
- Total Assets: $68.8 billion
- Expense Ratio: 0.14%
- Holdings: 33% Mtg Pass-thru, 29% US Treasury, 19% US Corporate, 7% US Agency, 12% Other
- Distributions: Monthly

Invest Grade Corp Bond (LQD) – Yield: 5.44%
The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the iBoxx $ Liquid Investment Grade index. The fund typically invests at least 90% of assets in the bonds of the underlying index, and at least 95% of assets in investment-grade corporate bonds.
- Total Assets: $12.2 billion
- Expense Ratio: 0.15%
- Holdings: 82% US Corporate, 18% Foreign Corp, 0% Other
- Distributions: Monthly

Emerging Mkts Sovereign Debt (PCY) – Yield: 6.44%
The investment seeks investment results that correspond generally to the price and yield (before fees and expensed) of an index called the DB Emerging Market USD Liquid Balanced index. The fund normally invests at least 80% of total assets in emerging markets U.S. dollar-denominated government bonds.
- Total Assets: $520.3 billion
- Expense Ratio: 0.50%
- Holdings: 80% Foreign Govt, 20% Other
- Distributions: Monthly

20+ Year Treasury Bond (TLT) – Yield 3.95%
The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Barclays Capital U.S. 20+ Year Treasury Bond index. The fund generally invests at least 90% of assets in the bonds of the underlying index.
- Total Assets: $2.4 billion
- Expense Ratio: 0.15%
- Holdings: 100% US Treasury
- Distributions: Monthly

Some authors have minimized the importance of bonds in a portfolio primarily focused on dividend growth securities. You can ignore them, but as the past decade has shown it may be to your own peril.

Full Disclosure: Long BLV, BIV, LQD, PCY. See a list of all my income holdings here.

(Photo: Steve Woods)

As for my portfolio, I consider asset allocation only when looking at my holdings in total. It would be much too difficult to maintain a good allocation within individual portfolios (income, growth, 401(k), Roth IRA, etc.), while trying to maintain my overall allocation. However, an investor could build a degree of allocation into a portfolio of dividend income securities. Consider the following:

Business Services Sector

• Automatic Data Processing Inc. (ADP)
  Yield: 3.33% | Style: Large Growth | Analysis
• C H Robinson Worldwide Inc. (CHRW)
  Yield: 1.86% | Style: Large Growth
• Expeditors International of Washington Inc. (EXPD)
  Yield: 1.16% | Style: Mid Growth

Consumer Goods Sector

• Clorox Company (CLX)
  Yield: 3.23% | Style: Mid Core
• Coca-Cola Company (KO)
  Yield: 3.04% | Style: Large Growth | Analysis
• Procter & Gamble Company (PG)
  Yield: 2.85% | Style: Large Core | Analysis

Consumer Services Sector

• Genuine Parts Company (GPC)
  Yield: 4.19% | Style: Mid Value | Analysis
• Sysco Corporation (SYY)
  Yield: 3.56% | Style: Large Core | Analysis
• McDonald’s Corporation (MCD)
  Yield: 3.22% | Style: Large Core | Analysis

Energy Sector

• BP Plc ADR (BP)
  Yield: 6.15% | Style: Large Value
• Chevron Corporation (CVX)
  Yield: 3.75% | Style: Large Value
• ExxonMobil Corporation (XOM)
  Yield: 2.56% | Style: Large Value

Financial Services Sector

• Harleysville Group Inc. (HGIC)
  Yield: 3.90% | Style: Small Value | Analysis
• Chubb Corporation (CB)
  Yield: 2.85% | Style: Large Value | Analysis
• Aflac Inc. (AFL)
  Yield: 2.38% | Style: Large Core | Analysis

Hardware Sector

• Diebold Incorporated (DBD)
  Yield: 3.67% | Style: Small Value
• Linear Technology (LLTC)
  Yield: 3.23% | Style: Mid Core
• Raven Industries Inc. (RAVN)
  Yield: 1.90% | Style: Small Growth | Analysis

Health Care Sector

• Meridian Bioscience Inc. (VIVO)
  Yield: 3.27% | Style: Small Growth
• Johnson & Johnson (JNJ)
  Yield: 3.08% | Style: Large Core | Analysis
• Cardinal Health Inc. (CAH)
  Yield: 2.10% | Style: Large Core | Analysis

Industrial Materials Sector

• Nucor Corp. (NUE)
  Yield: 3.40% | Style: Large Core | Analysis
• Emerson Electric Co. (EMR)
  Yield: 2.90% | Style: Large Core | Analysis
• 3M Company (MMM)
  Yield: 2.58% | Style: Large Core

Media Sector

• McGraw-Hill Companies Inc. (MHP)
  Yield: 2.63% | Style: Large Core

Pharmaceuticals Sector

• Eli Lilly & Company (LLY)
  Yield: 5.77% | Style: Large Value
• Abbott Laboratories (ABT)
  Yield: 2.97% | Style: Large Growth | Analysis

Real Estate Sector

• Essex Property Trust (ESS)
  Yield: 5.14% | Style: Mid Core
• Corporate Office Properties Trust Inc. (OFC)
  Yield: 4.29% | Style: Mid Core
• Federal Realty Investment Trust (FRT)
  Yield: 4.06% | Style: Mid Core

Telecommunications Sector

• CenturyLink Inc. (CTL)
  Yield: 8.10% | Style: Large Value
• AT&T Inc. (T)
  Yield: 6.54% | Style: Large Value | Analysis

Utilities Sector

• Integrys Energy Group Inc. (TEG)
  Yield: 6.61% | Style: Mid Value
• Consolidated Edison Company (ED)
  Yield: 5.59% | Style: Large Value
• MGE Energy Inc. (MGEE)
  Yield: 4.45% | Style: Small Core

Bonds

• Vanguard Short-Term Bond ETF (BSV)
  Yield: 2.74% | Style: Short-Term Bond
• Vanguard Intermediate-Term Bond ETF (BIV)
  Yield: 4.32% | Style: Intermediate-Term Bond
• Vanguard Long-Term Bond ETF (BLV)
  Yield: 5.16% | Style: Long-Term Bond

Needless to say, the above will not provide a perfect allocation, but it goes a long way to provide diversity in a portfolio focused only on income securities. In my personal portfolio, I buy the best available dividend securities and use my other investments to balance my asset allocation.

Full Disclosure: Long ABT, ADP, AFL, BIV, BLV, BP, CLX, CTL, CVX, ED, EMR, GPC, HGIC, JNJ, KO, LLY, MCD, MMM, NUE, PG, SYY, T, TEG. See a list of all my income holdings here.

(Photo Credit)

A recent CNN Money article asked the question, ’Can you count on those monthly pension checks from your former employer?’ and provided the following five things you need to know:

1. Many pension plans are underfunded.
   By law, company plans must have on hand most of the money promised to employees. This wasn’t an problem until the market turned down.
2. But underfunded doesn’t mean “can’t pay.”
   You’re not necessarily on the hook for the plan’s underfunding. Employers must cover their plans’ deficits.
3. It may, however, mean some changes in how much you’ll get.
   If the plan is less than 80% funded, you won’t have the option of taking the benefit as a full lump-sum payment. And if your plan is less than 60% funded, your company may be forced to freeze it
4. You’re at greater risk of losing your job than your pension.
   A company “can dip into cash reserves to fund its pension,” but if there are no reserves, the firm must cut costs, which may mean layoffs. So, ironically, your pension may be safe at the expense of your job.
5. Still, you ought to have a backup plan.
   While you’re fairly safe on benefits accrued, don’t count on future ones. Your goal should be to save enough for retirement to fill the gap between your estimated expenses and what you’ve earned in your pension.

Up until the Delta pension ran into problems, I (naively) assumed what I was owed from my company’s pension plan was an automatic entitlement. However, events over the last five years have shown that when things go wrong, you may only receive a small portion of what was promised in glossy HR pamphlet.

Looking at number 5. above, “you ought to have a backup plan”, I would go one step further and say, “You ought to have a primary plan.” My retirement plan relies primarily on what I have invested and control, such as my 401(k), IRA  and taxable portfolio. I realize that will likely get something out of my pension plan even if a ‘worse case scenario’ occurs, so I count that portion. As for social security, I don’t even consider it in my retirement plan. If I receive anything from social security, I will just treat it as a bonus.

To achieve my retirement goals, I am investing with a defined asset allocation model looks at all my investments in total. In retirement, your portfolio shifts from an investing mode to an income mode by either selling appreciated (hopefully) assets and/or withdrawing dividends for living expenses. My plan is to build an ever-increasing income stream from bonds and dividend stocks such as:

• iShares Barclays 20+ Year Treas Bond (TLT) – Yield: 4.16%
• Vanguard Short-Term Bond ETF (BSV) – Yield: 3.40%
• Abbott Laboratories (ABT) – Yield: 3.50% – Analysis
• Genuine Parts Co. (GPC) – Yield: 4.80% – Analysis
• Procter & Gamble Co. (PG) – Yield: 3.40% – Analysis

As the old adage goes, ‘Everyone has a plan – failing to plan is planning to fail.’  Retirement planning does not have to be complicated, but not doing it will complicate your retirement.

Full Disclosure: Long ABT, GPC, PG. See a list of all my income holdings here.

Cash/Money Markets/CDs – “Cash Investments”
I have always considered “Cash Investments” an oxymoron. Cash is where some investors park their money when they believe the investment risk is greater than the potential return – their sole focus is capital preservation. Unfortunately, some people consider Cash/Money Markets/CDs et.al. as investments. This is a dangerous assumption. Their slow and predictable growth is generally always below inflation, but since it is growing the “investors” often lulled into a false sense of security and do not notice that they are actually losing ground each year until it is too late.

Land/Real Estate – “They aren’t making anymore land.”
Many investors have discovered the hard way that bubbles can also occur in the real estate sector. What was once seen as a safe place to put your money and forget it is now in the midst on an ugly down-turn. According to S&P, home prices tumbled by 19.1 percent in the first quarter, the most in its 21-year history. Home prices have fallen 32.2 percent since peaking in the second quarter of 2006 and are at levels not seen since the end of 2002. Still, there are no signs home prices have hit bottom. “We see no evidence that a recovery in home prices has begun,” said, David M. Blitzer, chairman of the S&P index committee.

Gold/Precious Metals
If you look at a historical chart of gold prices, you will see a pattern, gold spikes to a new level during a crisis, then comes down to a level above the previous steady state. It then trades sideways until the next crisis. It would be hard to time your retirement to coincide with a crisis/spike.

Professionally Managed Equity Mutual Funds
Every year several professionally managed mutual funds out-perform the market. Unfortunately, it is rarely the same funds each year. It has been well documented that over time, most professionally managed funds under-perform the market.

Treasuries/Bonds
Treasuries and bonds tend to be less risky than equity investments, but have historically under-performed equities. It is important to note that there is risk associated with them. For corporate bonds, the companies could default and not pay them. For all bonds, including those issued by government, there is an interest rate risk – rising interest rates drive the price of bonds down. I do consider bonds an important part of my asset allocation. You can purchase bonds directly in the open market or bundled in funds/ETFs. Below are some low-cost Vanguard bond ETFs:

• Vanguard Short-Term Bond ETF (BSV) – Yield: 3.38%
  The Fund seeks to track the performance of the Barclays Capital 1-5 Year Government Index. This index includes U.S. Government, investment-grade corporate, and international dollar-denominated bonds, with maturities between 1 and 5 years.
• Vanguard Intermediate-Term Bond ETF (BIV) – Yield: 4.67%
  The Fund seeks to track the performance of the Barclays Capital 5-10 year Government/Credit Index. This index includes U.S. Government, investment-grade corporate, and international dollar-denominated bonds with maturities between 5 and 10 years.
• Vanguard Long-Term Bond ETF (BLV) – Yield: 5.60%
  The Fund seeks to match the investment performance of the Barclays Capital Mutual Fund Long Government/Corporate Index.
• Vanguard Total Bond Market ETF (BND) – Yield: 4.55%
  The Fund seeks to generate returns that track the performance of the Barclays Capital Aggregate Bond Index, and will maintain a dollar-weighted average maturity consistent with that of the index. The Index measures investment-grade, taxable fixed income securities in the U.S.

Also, if you live in the U.S. you can purchase Savings Bonds via TreasuryDirect.gov. However, recent changes in this program have made it less appealing.

Index Funds/ETFs/CEFs
For most people, indexed investments including mutual funds, exchange traded funds (ETFs) and closed end funds (CEFs) should make up the core of their investment allocation.  In effect, you are aligning your investment risk with what the index fund tracks. If you believe that over time that certain index funds, such as the  S&P 500, will outperform the the various approaches listed above, you should have money invested in it.  Index funds allow you to easily track any sector, market cap or index. Here are some varied funds in this category:

• Vanguard 500 Index Fund Investor (VFINX) – Yield: 2.90%
  The Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The Fund employs a “passive management” approach designed to track the performance of the Standard & Poor’s 500 Index.
• IShares MSCI EAFE Index Fund (EFA) – Yield: 3.94%
  The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI EAFE Index.
• IShares Trust DJ US Basic Mat Sector (IYM) – Yield: 2.58%
  The Fund seeks investment results corresponding to the price and yield performance, before fees and expenses, of the Dow Jones US Basic Materials Sector Index. Component firms are involved in the production of aluminum, chemicals, commodities, chemical specialty products, steel, and other goods and resources.
• IShares Trust DJ US Real Estate Index (IYR) – Yield: 8.69%
  The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones US Real Estate Index. Uses a representative sampling strategy. Component firms include hotel and resort firms and REIT’s.

Individual Stocks
Inherently, individual stocks will carry higher risk due to the lack of diversification when evaluated on a stand-alone basis. You can mitigate this risk to a degree by selecting solid dividend paying companies with a track record of increasing their dividends each year. Some of my personal favorites in this category are:

• Johnson & Johnson (JNJ) – Yield: 3.58% – Analysis
• Procter & Gamble Co. (PG) – Yield: 3.32% – Analysis
• Sysco Corp. (SYY) – Yield: 4.12% – Analysis
• PepsiCo, Inc. (PEP) – Yield: 3.49% – Analysis

When it comes to investing your money, there is no escaping risk. A good investor will determine the desired outcome and and invest in a way to acheive their goal with minimal risk.

Full Disclosure: Long BLV, VFINX, EFA, IYM, IYR. See a list of all my income holdings here.