If you are at all tuned into the stock market, you have probably heard comments that as the Baby Boomers hit retirement age in full force it will significantly impact the markets. But exactly what will the impact of the 78 million Americans born between 1946 and 1964 be as they enter into their retirement years? Will concerns about Social Security, market instability, and recent economic disasters color their thinking as seniors determine where to invest? IRAs and 401Ks have suffered, and CDs and bonds are generating historic low yields, so where will the Baby Boomers go to find yield and peace of mind?
According to the last US Census, an American turns 50 every 7 seconds (over 12,500 people every day), and by 2030, the 65+ population will double to 71.5 million Americans. Americans over 50 will represent 45% of the US population by 2015. Another way to look at it is currently of the 72 million family households in the U.S., 34 million of them are Baby Boomer households (MetLife Mature Market Institute). So will the Markowitz model choices of the Baby Boomers have a significant impact on the markets? You better believe it.
If financial guru predictions and T.V. talking head commentaries are correct then it is very likely that the Baby Boomer generation will be looking to dividend paying stocks to generate cash flow to supplement Social Security payments and pensions. Too many so called growth stock or growth mutual funds have failed to produce over the past 10 years, and in many cases they are lower today than they were 10 years ago. It is painfully clear that a monthly distribution plan from a growth stock portfolio can quickly eat into principal, contrary to what financial planners forecasted 10 years ago when they optimistically indicated that a 4% withdrawal rate was very reasonable in light of a projected 8% annual growth rate. So that leaves dividend paying stocks.
There is a wide universe of dividend paying stocks. The first place that the Boomers are likely to look is in the conservative list of blue chip stocks that have a consistent history of dividend growth over an extended period, say 25 years. Such a list is easily obtained by putting “25 years of dividend increases” into any search engine. A company that has consistently increased dividends over a long term is clearly focused on dividend growth, and is unlikely to change. Nevertheless as a word of caution, it is important to completely evaluate any stock to be sure that it currently meets your investment criteria, tolerance for risk, and that its fundamentals have not changed. Stocks in this list will generally pay 2-4%. While this may beat CD rates, it is far less than most Boomers are looking for in terms of return, so it is likely that the Boomers, in addition to purchasing these relatively conservative equities, will look elsewhere in order to supplement yield. There are three areas where higher yields are available, Business Development Company (BDCs), Real Estate Investment Trusts (REITs and MREITs), and Master Limited Partnerships (MLPs). In addition to higher yields, MLPs uniquely also offer a tax deferment aspect.
In the case of BDCs, REITS and MREITs (Mortgage Real Estate Investment Trusts), they pay no corporate taxes as long as they pass along 90% of their income to their shareholders. The shareholder then pays taxes at their individual tax rate. In the case of MLPs a high percentage of their quarterly distributions is generally treated as a return of capital rather than income due to high depreciation and other costs, and generally a high percentage of taxes is deferred until the MLP is sold.
A BDC is a company that is set up under the tax code to enable smaller investors to participate in helping small companies in their early stages of growth. A REIT is a company that purchases and manages real estate, while a Mortgage REIT generally specializes in purchasing various types of mortgages rather than property. Master Limited Partnerships, were also established under federal law to enable ordinary investors to participate in very capital intensive assets, generally but not limited to, oil and gas exploration, drilling, pipelines, and storage. A great deal of information is available on the internet on all of these equities. While they are somewhat different than ordinary stocks, and generally not as well known, it is almost a certainty that Baby Boomers are going to be looking into these high yielding equities to bolster returns in their retirement portfolios.
Yields ranging from 5% to over 20% are available in REITs/MREITs, 5% to 13% in BDCs, and 5% to 10% in MLPs. The Boomers are looking for yield, and, as they buy into the dividend paying category, they will drive the prices up and the yield will drop accordingly. By buying in now, an investor will lock in the higher yields that will decline as more and more Boomers retire.