Top Dividend Picks for Retirees – 2013

I am of the firm belief that the only way for a retiree to invest with an anticipation of receiving a life-time income from their investments is to buy dividend paying stocks. Ideally, big blue chip stocks with not only a history of paying dividends, but of increasing their payouts as well. We know the names; IBM, P&G, Coke a Cola (KO), Exxon… Unfortunately, many retirees having seen incomes frozen for a decade and portfolios ravaged by two bear markets, find that the 2%-3% dividend yields offered by these companies is just too little to pay today’s bills and enjoy even a modest retirement. To accommodate retirees with higher income needs I try and mix in a combination of the tried and true blue chips with a few “high yielders” to bring up the overall portfolio yield. I define “High Yielders” in today’s market place as stocks with a minimum of a 5% yield (more than double the S&P 500) and still hope to stretch that into the 7%+ range without adding too much risk.
So with that in mind here are two of my top picks, one in each category for 2013.

McDonald’s (MCD)
When looking for sustainable and increasing future dividends stodgy and boring, and needed is a very good thing. While food in general is a need, some might question the “need” behind a Big Mac. But ask any working single mom, and “Kid’s Meals” is on the need list. While third quarter 2012 saw an uncharacteristic slow down in earnings, for retirees we are looking at cash flow. Even with a drop in share price over 17% at its lowest, MCD announced an increase in their quarterly dividend in November from $.70/share to $.77/share. This marked the 36th consecutive year of increasing their payout.
Fundamentally MCD is an all weather stock. In poor economic times harried workers “downsize” their eating out bills by going from the mid-tier Applebee’s and Olive Gardens to McDonalds. Also expect more competition for Starbucks as MCD develops their “Café” identity. MCD has a strong international presence for growth in developing markets, and offers a currency hedge to the dollar.
Their payout ratio is modest at 52%, P/E at the market level at 15.35 for 2013, and modest growth expectations in the high single digits for 2013. MCD is a solid 3.47% yielder providing income stability and a likely raise well into the future.

SeaDrill Limited
While SeaDrill Limited (SDRL) provides a wild ride (Beta 1.97) it can be worth it for the investor needing a little extra juice in their dividend payouts as SDRL has a current yield of 9.21%.
SDRL is in a solid and growing business. They provide deep water and submersible rig platforms for oil and gas drilling and exploration. Their largest division “Floaters” are fully leased for 2013.
Of course no company sports a (%+ yield without their being question marks. For SDRL there are two major market concerns. The first is debt. Simply put SDRL is considered a “highly leveraged” company.
This is fine as long as cash flow can support the debt. Recently SDRL’s stock took a tumble when they agreed to sell their tender rigs division. While accounting for a small portion of cash flow, any disruption is seen as a concern. However, SDRL also announced that they plan on using the proceeds to invest in more floaters – a higher revenue source per rig, and as mentioned above, their current inventory is fully leased. Bottom line, by the end of 2013 revenues should be up, not down without an increase in debt.
Market concern two is that SDRL paid two dividends in December 2012. Their normal December dividend and a prepayment of the March 2013 dividend. For new investors, if SDRL maintains their 2012 payouts, this would mean a yield of about 6.14% vs. the reported yield of 9.21%. However with a projected P/E of 11.61 for 2013, and earnings growth potential, I see SDRL as a way to boost income in a very solid industry and a very solid capital gain potential as new rig development and leasing accrues revenue to their earnings.

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bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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