Daily Gains Letter

Retirees Tired of “Slow and Steady” Income Need to Check This Easy Strategy Out

By for Daily Gains Letter |

150313_DL_whitefootRetirement planning doesn’t end once you retire. It just moves into a different phase. One of the safest paths to building wealth for those already in retirement is through big blue-chip stocks that provide consistent quarterly dividends.

Slow and steady isn’t good enough for some investors, though. Some retirees need to build wealth more quickly. A recent report shows that Americans’ confidence in their ability to retire comfortably is at historic lows.

Just 14% of Americans say they are “very confident” they will have enough money to live comfortably when they retire, while 23% say they are “not at all” confident. Almost 60% of middle-class retirees will likely run out of money if they maintain their pre-retirement lifestyle and don’t cut spending by at least 24%. (Source: Helman, R., et al., “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” Employee Benefit Research Institute web site, March 2012, last accessed March 14, 2013.)

In fact, the fear of outliving retirement income is actually greater than the fear of dying. An astounding 61% of baby boomers fear outliving their money in retirement more than death. (Source: “Outliving Your Money Feared More Than Death: Allianz Life Study Reveals Boomers Guessing at Retirement Needs,” Allianz Life Insurance Company of North America web site, June 17, 2010, last accessed March 14, 2013.)

Those already enjoying their golden years, unhappy with the measly returns that bonds, Treasuries, certificates of deposit (CDs), and banks are providing and impatient with the small gains made on blue-chip stocks, may want to consider one of the more lucrative areas for investing—small-cap dividend stocks.

When it comes to dividends, most investors think of big, mature companies that have provided steadily increasing dividend yields for decades. While the dividend yields are consistent, growth isn’t. But that’s the pay-off—low-risk stocks that provide a steady income stream and negligible price appreciation.

That may be fine for investors with a conservative investing approach, but it doesn’t bode well for retirees who are looking to generate a quarterly income stream and price appreciation. That’s where small-cap dividend paying stocks come in. While they’re beyond the start-up phase, they’re still expanding. There’s also the pay-off—higher risk with a steady income stream and a chance at strong price appreciation.

Those looking to park their retirement funds in small-cap dividend stocks can mitigate the risk by understanding the business they want to invest in. If you don’t understand the business, stay away.

Prospect Capital Corporation (NASDAQ/PSEC) is a closed-end investment company that lends to and invests in private and micro-cap public businesses in the United States and Canada. The company’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments.

Prospect Capital provides an annual dividend of 11.8%. Furthermore, over the last 12 months, the company’s share price has climbed almost 17%. And within the last 18 months, Prospect Capital’s share price has advanced by more than 75%.

New Flyer Industry Inc. (TSX/NFI) is the leading manufacturer of heavy-duty transit buses in the United States and Canada, with more than one-third of the market share.

The company provides an annual dividend yield of roughly 5.6%, or $0.59 per share, paid monthly. Since the beginning of 2012, New Flyer’s share price has climbed 80.1%; year-to-date, it’s up 20.4%.

In an effort to add wealth to their retirement portfolio, a large number of retirees have turned their backs on more conservative income streams like bonds and treasuries looking for better yields and a sizable return.

As long as interest rates remain low, this investment strategy will only continue to provide financial growth for retirees.

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