Wednesday, January 31, 2018

High-Quality, Low-Risk Dividend Stocks

To a large extent we are a product of our environment. Our life experiences not only shape out behavior, but at its very core, they shape our thought process. The Great Depression forever changed a generation of people. It appears the 2008-2009 financial crisis (Great Recession) may be having a similar effect on another generation.

As an investor in the financial markets, I am often stunned when talking to Gen Y Millennials (those born between 1977 to 1994) and learn their retirement savings are primarily low-risk, safe investments such as money market funds, CDs and Treasuries. Many of these Millennials were just building their financial foundation when the financial crisis hit. Some lost everything, including their job, savings and independence.

There are much better alternatives for the ultra-conservative Gen Y investors than money market accounts, Treasuries and CDs. A conservative strategy focusing on high quality, low risk dividend stocks should significantly out-perform the above investments, with very little incremental long-term risk. Based on my risk rating, here are several low risk companies for conservative investors to consider:

The Coca-Cola Company (KO) is the world's largest soft drink company, and also has a sizable fruit juice business.The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 55 consecutive years. Yield: 3.1%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device, and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 55 consecutive years. Yield: 2.3%

Aflac Incorporated (AFL) provides supplemental health and life insurance in Japan and the U.S. Products are marketed at work sites and help fill gaps in primary coverage. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 35 consecutive years. Yield: 2.0%

Wal-Mart Stores, Inc. (WMT) is the largest retailer in the world, operating a chain of over 10,000 discount department stores, wholesale clubs, supermarkets and supercenters. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 43 consecutive years. Yield: 1.9%

Illinois Tool Works Inc. (ITW) is a diversified manufacturer that operates a portfolio of 60 business units that serve industrial and consumer markets globally. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 54 consecutive years. Yield: 1.8%

With a diversified portfolio made up of 2/3 stocks and 1/3 bonds you could reasonably expect to earn an average of 8-10% over time. Between 1929 and 1932, stocks lost approximately 85% of their value. In 1933, prices roared back just under 54%. During the 1990's stocks gained around 18% annually, about double the historic average.

What the Gen Y investors haven't realized is that the path they are following carries risk also. Ironically, they may have chosen the most dangerous investment of all and end up losing to inflation.

Full Disclosure: Long EMR, CVX, PG, JNJ, MMM, in my Dividend Growth Portfolio. See a list of all my Dividend Growth Stocks Portfolio here.

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Tags: KO, JNJ, AFL, WMT, ITW,

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