Retirees: 2 Essential Things About Investing You Should Keep in Mind

If you’re near retirement or are retired, you should keep these things in mind before investing in quality stocks such as Royal Bank of Canada (TSX:RY)(NYSE:RY).

| More on:
The Motley Fool

Ideally, you will have started building a diversified portfolio of quality assets that generate a regular income for you many years before you retire. I’m emphasizing income instead of capital gains because income can be generated more reliably than capital gains.

If you do have such a portfolio, you only have to decide if you need to rebalance the portfolio from time to time with capital preservation in mind.

Capital preservation

For a stock portfolio, capital preservation can be viewed from different perspectives. Are you buying stocks at a discount to their intrinsic values? Are you buying quality assets? Would you consider selling some or all of the shares of a stock because it’s overvalued and use the proceeds to buy another stock (thereby rebalancing with capital preservation in mind)?

In the last decade, Royal Bank of Canada’s (TSX:RY)(NYSE:RY) normal multiple has been 12.5. At about $75, its multiple is 11.3, so it has a margin of safety of about 10%. Royal Bank is Canada’s leading bank, but it generates about 20% of its revenue from the U.S. and 18% internationally. Further, it has an S&P credit rating of AA-. So, it qualifies as a quality company.

Regular income

It’s difficult to consistently trade stocks for a profit. Retirees probably prefer to earn regular passive income from their stocks instead. The first stocks that retirees should consider are dividend payers that generate rich cash flows. These stocks include utilities, real estate investment trusts (REITs), banks, and telecoms.

Royal Bank has increased its dividend 10% per year on average from 2005 to 2015. Its quarterly dividend is 5.3% higher than it was a year ago. In the medium term, Royal Bank is expected to grow its earnings in the range of 4-7% per year, so retirees can expect its dividend to grow more or less in that range, assuming its payout ratio remains at 50%.

Utilities such as Brookfield Renewable Energy Partners LP (TSX:BEP.UN)(NYSE:BEP) offers an above-average yield of 6.5%. However, there’s little margin of safety for the shares today. Additionally, its distribution is U.S. denominated, so its yield gets a boost from the strong U.S. dollar.

Some retirees might wish to diversify with an ETF. iShares S&P TSX Capped REIT Index Fund (TSX:XRE) aims to provide capital growth by replicating the performance of the S&P/TSX Capped REIT Index, which comprises of 17 equity REITs. The ETF offers an above-average yield of 5.3% but would be a better deal if investors can buy it at the $14.50-14.80 level.

Conclusion

Managing a stock portfolio for retirement is a balancing act between capital preservation and current income. You might rebalance the portfolio from time to time, and you should know where your proceeds will go before you rebalance.

However, if you have built a diversified portfolio of quality dividend stocks over many years, sometimes it’s best to just leave it be, especially if your cost basis is low, because every move you make costs transaction fees, and you won’t make the right choices every time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Brookfield Renewable Energy Partners LP and Royal Bank of Canada (USA).

More on Dividend Stocks

Asset Management
Dividend Stocks

A 10% Dividend Yield Today! But Here’s Why I’m Buying This TSX Stock for the Long Term 

A 10% dividend yield stock has risks in the short term but growth in the long term. This stock is…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

The Safest Dividend Stocks That Could Pay Big Bucks Forever

These two safe Canadian Dividend Aristocrats could help you earn safe income for decades to come.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

2 High-Yield Dividend ETFs to Buy to Generate Passive Income

High-yield dividend ETFs can be major winners in any portfolio, offering diversification, returns, and security. But which are the best?

Read more »

jar with coins and plant
Dividend Stocks

Want $97 in Super-Safe Monthly Dividend Income? Invest $15,000 in These 3 Ultra-High-Yield Stocks 

Do you have a lump sum amount and are worried you will spend it all? Consider investing in dividend stocks…

Read more »

woman looks out at horizon
Dividend Stocks

Top Picks: 3 Canadian Dividend Stocks for Stress-Free Passive Income

Do you want passive income? These three offer not just strong passive income now, but a large future opportunity for…

Read more »

hand stacking money coins
Dividend Stocks

Invest $500 Per Month to Create $335 in Passive Income in 2025

By investing $500 per month into a high yield stock like First National Financial (TSX:FN), you could get $337 in…

Read more »

The sun sets behind a power source
Dividend Stocks

Fortis Stock: Buy, Sell, or Hold?

Fortis has delivered attractive long-term total returns for investors.

Read more »

worker carries stack of pizza boxes for delivery
Dividend Stocks

Is Restaurant Brands International Stock a Buy for its 3.3% Dividend Yield?

QSR stock still trades near 52-week highs yet offers a pretty good dividend as well. So, is it worth it,…

Read more »