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Use The Drop In Oil Prices To Boost Retirement Income

This article is more than 9 years old.

Oil's dramatic sell-off comes with good news and bad news. The bad news is that it has put global markets on edge and dampened overall gains for the year. The good news is that the price drop has put some quality, dividend paying companies on sale. While most experts and economists are talking about the benefits it may provide to the economy and consumer spending, the real benefits are for savvy investors ready to take advantage of the plunge.  Therefore, I’ve put together a top five list of companies I think are well positioned to help boost retirement income.

To start, we must acknowledge that we don’t know how bad things may get. Oil could be nearing a bottom or have another $5 or $10 to go. In either case, we want to make sure we consider companies that are positioned to continue to pay their dividends in case of an extended crisis. This is an important point to consider for those seeking retirement income. Fortunately, it translates into a measurement called the pay-out ratio that we can use in the selection process.

The pay-out ratio is simply the percentage of profits returned to shareholders in the form of a dividend. Logic goes that the lower the number, the more sustainable it is. As you can imagine, if oil continues to tumble, a company’s profitability may be affected. Therefore companies that payout a large percentage of existing profits may have a hard time maintaining their dividend payments, while companies with lower pay-outs may be able to continue making payments during rough patches.

Another important factor to consider in a retirement income plan is that dividend income is based on the number of shares one owns, not the price of the stock. Understanding that concept can take some of the fear out of buying stocks in a down trend since the focus is on the income generated, not the short-term price fluctuations.

For example, our top pick, Chevron , was trading around $123 back in September. Had an investor put $10,000 to work in it back then, they would have ended up with 81 total shares. Based on an annual dividend payment of $4.28 per share that would equate to roughly $347 annually. The same investment today would net them 98 total shares (at $102) and thus annual income of $419. That’s a bargain right now that any income investor can appreciate no matter if the stocks drops another 5-10%.

Along the same lines, the table provides an important clue for retirees interested in an increasing stream of retirement income to help combat inflation. Once again, Chevron not only has a low pay-out ratio (anything below 60% is considered low) but a long history of dividend increases. That means for the last 28 years they have rewarded shareholders with a higher pay-out, year-after-year. Combined, those are two factors retirees can use to evaluate stocks and sleep better at night.

It’s also necessary to point out that not all stock categories are the same and therefore require separate analysis. Some investment types such as Master Limited Partnerships and Limited Partnerships can come with additional obligations including a requirement to distribute most, if not all, of their profits to shareholders. As you might expect, this would dramatically increase their pay-out ratio, and thus, a need to be evaluated on a different level. As a result, it’s not uncommon to see these types of investments near or even above a pay-out ratio of 100%.

I’ve also included P/E ratios for investors to analyze and compare. While CVX’s PE is the lowest and may suggest some obvious value and long-term potential for capital appreciation, the others might not be considered screaming buys hovering near 20. However, like other areas of life, you get what you pay for.  In this case, investors may have to trade-off some growth with solid fundamentals, dividend increases, and of course, income.

While our analysis includes other factors not listed in the table including fundamental data such as EPS, ROA, and ROE as well as risk factors including Beta, Standard Deviation, and competitive advantages, it’s always important to point out that these particular stocks, and even individual securities may not be suitable for every investor. Investors should consider this data as a starting point for their research and take steps to do their homework before investing in them (including seeking professional advice).

Overall, using the drop in oil prices may offer some investors the opportunity to buy more shares on the dip, pick companies that allow them to sleep better at night, and of course boost their prospects for retirement income.

Disclosure:  Long CVX, EPD, TRP

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