J.R.'s Commentary Featured in U.S. News and Smart Asset
J.R.’s Commentary Featured in U.S. News and Smart Asset
Why You May Want to Avoid this Guaranteed Product in Retirement (Smart Asset, May 9, 2023)
This article highlights an SSRN research paper I co-authored in 2022 on the consumer annuitization decision in a low-interest rate environment. It is important to note that interest rates were dramatically lower when we published our paper on Social Science Research Network (SSRN).
As rates rise, the optimal allocation in any given retirement spending portfolio should probably shift more toward fixed-income investments (e.g., CDs, treasuries). When interest rates were near their lows, the 80:20 allocation cited in the article was closer to optimal than the popular 60:40 allocation model. In today’s much higher interest rate environment, I believe 60:40 may be closer to optimal.
If interest rates continue to rise, the ideal allocation for sustainability may shift even further away from stocks. Simply put, if you could earn 8-10% interest on investments with little or no default risk, do you really need to put up with the volatility of the stock market with a large portion of your portfolio? That was the investment environment when I first entered the industry in 1990.
(US. News & World Report, May 10, 2023)
A couple of weeks ago, a reporter for U.S. News & World Report contacted me for comment on Utility stocks in the current investment environment. Although the subsequent article he wrote was not about rising dividend companies per se, I offered up a few examples of companies that might be suitable additions to a direct indexing dividend stock portfolio as a source of current passive income that may rise over time at a pace that is faster than the cost of living index. In the interview, I shared my three primary quantitative screening criteria - dividend payout ratio of less than 70% (for utilities only), P/E multiple less than 20 times forward earnings, and trailing 5-year dividend growth rate of at least 5%. The author of the article did not accurately explain this. He also referenced me as a co-founder of Nest Egg Guru (my software company), instead of as the founder of Financial Planning Hawaii and Fee-Only Hawaii. I am guessing that he was rushing to meet a deadline.
The bottom line is that I believe utility stocks can be a good source of tax-favored income that can help investors keep ahead of the cost of living over time. I include utilities that meet my screening criteria in nearly every rising dividend stock portfolio I construct.
Note: My comments in the article were in response to the reporter’s query and are intended to be general in nature. Utility stocks are definitely not suitable for every investor, and my comments should not be construed as specific recommendations to invest in any of the companies referenced.
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The information contained herein is general in nature. Neither Financial Planning Hawaii nor J.W. Cole provides client-specific tax or legal advice. All readers should consult with their tax and/or legal advisors for such guidance in advance of making investment or financial planning decisions with tax or legal implications.