PUTTING 401(K) INTO CASH CAN BE DANGEROUS

Feb. 1, 2010 – Jack Sirard contributing writer

By Jack Sirard

Softball News Columnist

New retirees are always a bit nervous about their investments and for good reason. If they make a fatal error, they could soon find themselves having trouble making ends meet, or even worse having to go back at work.

That’s why I was a little more than concerned when a friend told me that after retiring in early 2009, she had rolled over her entire 401(k) into a self-directed IRA that was 100 percent cash.

While there’s nothing wrong with having cash on hand, putting all your investment nest egg there can cost you in the long term, particularly if it’s in the form of a money market fund that pays next to nothing. I have nothing against money market funds as a place to hold money while you’re surveying the investment field as it’s always wiser to take your time and make savvy decisions.

But leaving large amounts of money there when there are better options certainly cost my friend last year when the stock market bounced back smartly. And if inflation starts to take off as many experts expect, that can only add to your woes if your investments don’t keep pace.

One good option would be to carefully consider dividend-paying stocks, particularly from companies that have a long-term record of making consistent payouts.

Boston-based investment adviser Dan Seidman says that “historically, dividend paying stocks have out performed non-dividend paying stocks. In theory, they are less volatile. It is also a good indication of company strength.”

He especially likes companies if they raise their dividend in this current economic environment. “Management is indicating that business and cash flow are strong enough to maintain a higher yield,” he says “and that should pay off for investors.”

While you can argue that both bonds and certificates of deposit have long been considered safer investments than stocks. in this era of incredibly low interest rates, these two investments can cost you.

Just check out the current returns: A CD right now might offer a 1.5 percent yield and a 10-year Treasury might pay 3.75 percent.

If you’re inclined to give stocks a try, the first question is where can you find companies that pay consistent dividends?

One place to start is to check out some of the bluest of the blue chips stocks, namely those stocks that make up the Dow Jones industrial average. In fact, there is a whole investment strategy based on investing in what’s called the High Yield 10 or the 10 highest yielding Dow components at the end of the year. The investment idea is to put equal dollar amounts into each of these 10 stocks with the thought that dividends are more stable than stock prices and a high dividend yield points to a stock that is near the bottom of its business cycle and has a beaten down share price that is poised for a rebound.

One danger here is that companies can decide to cut or even omit their dividends if they get into financial trouble. That certainly was the case with Citigroup which once paid a healthy dividend.

A recent look at the list of highest yielding Dow stocks showed the following:

AT&T, Verizon, EI DuPont de Nemours, Kraft Foods, Merck, Pfizer, Chevron, McDonald’s, Home Depot, and Boeing as the top yielders with yields ranging from 3.1 percent for Boeing to a high of 6 percent for Ma Bell.

One of Seidman’s favorites is Procter & Gamble, ticker symbol PG. His reasoning is simple: “People will always need Procter and Gamble’s products whether we’re in a recession or a economic recovery. With the stock selling near $60, it has an annual dividend of $1.76 a share or a yield of just slightly less than 3 percent.”

He adds, “In this day when you get 0.9 percent for a one-year CD, or 0.25 percent for a savings account, receiving close to 3 percent in a solid company is a great deal.

“When you see a company with a history of raising its dividend, that implies a strong management team. Of course, this is not to imply that a stock is like a CD or money market, but, for the relative risk of owning a stock, you are being compensated via the dividend yield.”

A word or two of warning: You can’t buy a stock solely based on its yield. Check it out thoroughly to make sure that the company has the money to continue to pay the dividend now and in the future.

Jack Sirard is a retired national financial columnist and is a writer for Senior Softball News.