"Get Your Finances Ready for Retirement"-Retiree Search For Revenue
Monday, March 16, 2009SUZANNE PRATT: Well one consequence of the current recession is low interest rates. While they may be good for home buyers, lower rates can be devastating for retirees who depend on interest income. Now many retirees are considering investments that promise higher returns. But as we continue our series, "Get Your Finances Ready for Retirement," Joe Collum reports those higher returns can come with far greater risk.
JOE COLLUM, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bank certificates of deposit and money market funds have long been favorites of retired investors. But while they're still among the safest and most liquid investments around, their interest rates have fallen to the lowest levels in years. So it's not surprising that thousands of retirees recently headed to the world money show in Kissimmee, Florida, searching for investments that provide better income. Gary and Linda Wachtel were among them.
LINDA WACHTEL, RETIREE: We're retired. Were interested. Who's not interested in income? Yes.
GARY WACHTEL, RETIREE: Growth, income, any way we can make a few bucks.
COLLUM: At the money show, many real estate investment trusts or REITs and energy companies touted the high income provided by their securities. But they gave far less attention to the fact that oil and real estate prices have plummeted lately, with disastrous results for many investors. For example, one brochure showed a 30 percent growth rate in the firm's dividend over 23 quarters. However, it did not note a 70 percent drop in the firm's stock price since then, resulting in a negative total return. Another common selling point: the high current yield on a stock.
GARTH DOLL, INVESTOR RELATIONS MNGR., ENERPLUS RESOURCES FUND: We pay a distribution on a monthly basis. We're currently yielding about 8.5 percent.
COLLUM: That may sound good, but remember, that 8.5 percent will end up as your annual yield only if both the firm's dividend and its stock price hold steady. And while some firms may imply that retirees can count on their dividend payments, that is not a sure thing. Take Gladstone Capital. It's paid dividends for years, but it's in the business of lending money to small companies and its stock has fallen sharply on fears that it may have to cut its payout. CEO David Gladstone dismissed those concerns.
DAVID GLADSTONE, CHAIRMAN & CEO, GLADSTONE CAPITAL: We have not cut our dividend and I think some people are wondering why we haven't cut our dividend. But our track record has been -- and I've been in this business now for 30 years -- in all of the funds that I've managed, we've never cut the dividend.
COLLUM: But James Trippon of dividendgenius.com says just because a company has maintained its dividend in the past, doesn't mean much for the future. Right now, he says income investors need to look for companies that can ride out the weak economy.
JAMES TRIPPON, EDITOR, DIVIDEND GENIUS: There's no guarantee that a dividend is going to be safe, but you can find a lot of companies with strong financial statements that have industries that are evergreen, such as some of the energy players, some of the sin tax type companies, the cigarette companies that still have high dividend yields. People are going to continue to use their products day in and day out, year in and year out and they really not as caught up in these cycles as we are in some of the financials or in the real estate sector.
COLLUM: Interest payments on bonds are generally more secure than stock dividends, but there are different types of bonds with different levels of risk. And Emily Brandon of "U.S. News & World Report" says high- yield corporate bonds, also known as junk bonds, need to be approached with special caution.
EMILY BRANDON, U.S. NEWS & WORLD REPORT: With junk bonds, it's usually a financially struggling company. You're likely to get higher interest rates but you -- if the company goes under, you could lose your investment, so that is a concern.
COLLUM: So while the promise of high income may sound good, just remember generally the higher the income, the greater the risk and that's a trade-off you need to keep in mind. Joe Collum, NIGHTLY BUSINESS REPORT, Kissimmee, Florida.
