As a retiree, preserving the wealth you’ve accumulated should be your number one priority. You didn’t build up your nest egg over the course of many decades only to risk it on an artificially high yielding security that could blow up in your portfolio and put your original retirement plan in jeopardy.
While building the largest income stream may be enticing over the short- to medium-term, it’s important to consider the grander scheme of things when constructing your retirement portfolio.
We’re entering year 10 of the current bull market, and most pundits would agree that the probability of a recession occurring at some point over the next two years is high. The U.S. Federal Reserve keeps hiking interest rates despite President Trump’s disapproval, and as the yield curve inches closer towards inversion, it’s only prudent for retirees sacrifice a bit of near-term yield for a higher degree of safety so their portfolio can ride out the tough times that lie ahead.
There’s no question that Fed chair Jerome Powell could bring this economy to its knees with his incredibly hawkish and unaccommodating monetary policy. A Fed-triggered recession would wipe out a substantial amount of wealth, but it’s also not a given, so you shouldn’t pull your money out of the market today and try to buy back after the next inevitable crash occurs.
You could be waiting longer than expected — a lot longer. And all the while your income stream would be next to nothing if invested in risk-free assets, precious metals or stuffed under your mattress!
You can still enjoy a reliable income stream while minimizing your downside come the next inevitable recession. Consider Fortis (TSX:FTS)(NYSE:FTS), a “bomb-shelter” stock that I believe all retirees should have in the core of their retirement portfolios. In the financial disaster of 2007-08, Fortis only lost around 26% of its value from peak to trough while the S&P 500 Composite Index plunged over 55% peak-to-trough.
At the time of writing, Fortis is already down 13% due to the headwind of rising interest rates, the worst of which is likely already baked into the stock. While many investors have ditched the stock over its less-valuable dividend yield (4.06%), and its 5-6% in expected annual dividend raises, I think most investors are overly bullish on markets and are severely discounting the incredible margin of safety that Fortis shares have to offer at today’s levels.
In the next recession, I don’t see Fortis falling another 15% from today’s levels, especially when you consider that interest rates will likely retreat as the recession bring us into the next business cycle.
Moreover, management is going to continue funnelling cash into growth projects to keep its long-term dividend growth plan alive. It’s a given that Fortis will reward shareholders with at least 5% in hikes per year under any economic environment, but I think the company may have the capacity to deliver a lot more than its dividend promise if its compelling power, grid and transmission projects can produce larger-than-expected cash flow streams.
Foolish takeaway
Fortis is growing pretty fast for a utility. And come the next recession, retirees will get +5% dividend raises and minimal capital downside, as most other investors see their capital and dividends go up in a puff of smoke.
It literally pays dividends to prepare your defences well before the fact.
Stay hungry. Stay Foolish.
