TAKING STOCK: 4 percent portfolio income


By Malcolm Berko

Dear Mr. Berko: My 67-year-old father will retire late this year and will need at least $24,000 annually - plus annual inflation adjustments - from his nearly $600,000 individual retirement account. His broker, who I think is a dummy, discussed his "Rule of 4" with him and wants him to invest $300,000 in five common stock funds and $300,000 in five different types of bond funds: U.S. corporate, U.S. government, foreign government, foreign corporate and Build America. I suspect this Rule of 4 is a new way to sell mutual funds (enclosed is the list of investment names) and for this jerk to maximize his commissions. If you have any investment suggestions, I'd be happy to show them to my father. He can afford to be a little risky because I'm willing to cover any shortfall. Please respond quickly, because my father is enamored with this darn broker and may take his advice.

- FL, Bloomsburg, Pa.

Dear FL: Frankly, I like this broker's suggestions, especially Build America Bonds. He's neither a dummy nor a jerk; rather, he seems to be knowledgeable. He also seems to have put a lot of good thought into those 10 recommendations, all of which are exchange-traded funds or closed-end funds. And because this broker works for a good discount house, the commission would be niggardly. I think there's a 60-40 chance those 10 recommendations would give your father the income he needs, though he would have to invade principal.

I've heard of the Rule of 72, the Rule of Thirds and the Rule of St. Benedict of Nursia; however, no reader has ever asked me about the Rule of 4. The Rule of 4 was concocted as a rule of thumb by the financial planning industry and makes as much sense as searching for saltwater penguins in a sandstorm. The rule assumes your retirement portfolio mix is 50 percent stocks and 50 percent bonds. And using 30 years of back-tested data (from 1962 to 1993), it shows that retirees who withdraw 4 percent of their portfolio balance, adjusting annually for inflation, can create a paycheck that will last for at least 30 years. Of course, that was before Google Glass, Elon Musk and American Pharoah. The realities of today's market make the Rule of 4 as worthless as horns on a bunny rabbit. You'll be awake most nights concerned about living in squalor and having to collect coupons for Alpo or Meow Mix.

An analyst at Putnam with whom I often discuss the market made an interesting recommendation. He suggested investing $300,000 of your father's money as recommended by the broker you don't like and then using the remaining $300,000 to invest in the following stocks, each of which yields better than 5 percent and has a long history of annual dividend increases.

He recommends AT&T (T-$34), the dividend of which yields 5.5 percent and has been increased for 21 consecutive years. He's convinced that T will soon be on a strong growth track.

He thinks Royal Dutch Shell's Class B shares (RDSB-$58), down 30 points from their high and yielding 6.3 percent, are a classy steal. Always buy class when there's blood on the streets. It may take a year for Royal Dutch Shell and the other big oil companies to regain their momentum, but at the current price, this equity looks very attractive.

W.P. Carey (WPC-$60), established in 1973, is an international real estate investment trust, leasing primarily to world-class tenants. The 6 percent dividend has been raised for 20 consecutive years.

HCP Inc. (HCP-$37) is a REIT serving the "can't lose, always profitable" health care industry. The dividend, which yields 5.8 percent, has been raised for 14 consecutive years.

Finally, GlaxoSmithKline (GSK-$43), which recently lowered its often-raised dividend to $2.31 because several blockbuster drugs came off patent last year, yields 5.2 percent. GSK's recent purchase of Novartis' animal vaccine business and the implementation of new cost-cutting measures suggest a higher price and higher dividends in the very near future.

FL, these stocks will rise and fall in value; however, their revenues, earnings and dividends are sound and should improve modestly each year. This portfolio would have a better chance of serving your father's needs, and you might not need to access principal if inflation were to remain modest.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Published: Thu, Jul 23, 2015