These Investments Are Suitable for Just About Any Retirement Portfolio

Back in my early days as a broker, electric utilities were the backbone of most retired portfolios. And why not?

They paid huge dividends. They were some of the most stable stocks you could own. They literally were a government-regulated monopoly.

But, most importantly, my older clients believed in and trusted the companies.

[ad#Google Adsense 336×280-IA]Maybe “loved and cherished” is a better way of putting it.

In Baltimore, where I was working in the early ‘90s, nothing was more beloved than Baltimore Gas and Electric (BGE).

To recommend selling any of it was the best way to lose a client.

But there was something called deregulation on the horizon.

The utilities’ government protection would be going away, effectively creating more competition in the industry.

No one wanted to hear that it meant trouble for their gas and electric stock.

I called every client who owned Baltimore Gas and Electric and begged them to sell at least half of their position and buy Bristol-Myers Squibb Co. (NYSE: BMY).

The trade made sense.

My firm had just bought a boatload of Baltimore Gas and Electric a few months earlier on a secondary offering at around $27, and it had shot up to about $31. The company had also just paid its huge dividend of about 7%.

It was a great trade, and we just happened to hit its final price peak. It was never that high again, and as deregulation hit, its dividend was cut annually.

Did I know I was hitting its last hurrah? I wish I could say I did, but no, I did not.

Here’s what I did know:

It was at or very close to its 52-week high.

Within a few months, we racked up a total return of over 18% in a stock that had usually grown at about 6% a year.

And we could buy Bristol-Myers for about $15 and get about a 4.5% dividend. It was in no threat of deregulation and it had an unlimited future.

A little more than 20 years later, Bristol-Myers now trades at about $67. That makes its $1.48 dividend worth about 9.8%.

Many of my clients had gains from Baltimore Gas and Electric in excess of 100%, and many refused to sell any of it. “Steve, not my gas and electric,” they would say.

(As a side note, there are still brokers in the business who shake their heads in disgust and call me all kinds of names for making this trade.)

This was the single most profitable trade I ever made for my clients. They made a huge return on the sale, and the gains racked up over the years in Bristol-Myers have been massive.

The lesson here is that the reverse of the “Gas and Electric Love Affair Syndrome” is also true. It’s a case of hate and avoid, and it will cost you money, too.

Utilities this year have been crushed, and most analysts are recommending to avoid them. The Fed has threatened to raise interest rates, which has driven most utility firms down around 20%.

You’d have to be crazy to buy an interest-rate-sensitive stock in a market where rates have to go up, right?

Well, here’s what I know now:

In 2004, the Fed raised the interest rate one-quarter of a point at every meeting that year.

Despite the increasing rate environment, which is supposed to hurt stock prices, the S&P 500 went up 8.2%.

The supposed weakest of the bunch in that type of rate environment, utilities, went up 32%!

There is, of course, no guarantee the Fed will raise rates this year. Between Greece’s problems, China’s weakness, instability in the Middle East and weak economic numbers here at home that have refused to budge, most believe we could continue to see a “wait and hold” position into 2016.

But the market has already priced in the rate increase for utilities.

The chart below for Utilities SPDR (NYSE: XLU) – a utility exchange traded fund – and the S&P 500 tell the whole story. While it hasn’t been much of a year for the S&P 500, the utility index has been slammed unmercifully. Utilities are looking cheap.

The current dividend yield for the S&P 500 is about 1.9%. Utilities are paying 3.5% to as high as 4.5% for quality companies.

In a yield-starved market, that’s attractive. Add to that the stability of their market and you have a nice opportunity for retired investors.

Take a look at utilities. They aren’t the dividend monsters they once were, but they survived deregulation and are suitable for just about any retirement portfolio.

Good investing,



Source: Wealthy Retirement