The first Canadian Baby Boomers will reach the traditional retirement age of 65 in 2011. I doubt these retiring Boomers will embrace bonds and annuities as enthusiastically as their parents did.
While they may wish they had joined company defined-benefit pension plans in their youth, many are not so fortunate. If blessed with health and longevity, their biggest enemy will be the twin evil of taxes and inflation.
That's why I'll go out on a limb and make a prediction: Boomers won't abandon their love affair with stocks, despite being jilted by two market crashes in the past decade. However, they will flock to certain types of stocks--those that pay dividends, and the juicier the better.
Such stocks offer the promise of growing their dividends at or beyond the rate of inflation. And favourable tax treatment means that outside registered plans, those dividends will generate higher after-tax returns than comparable interest-bearing investments.
This will be a departure for Boomers from their more youthful infatuation with growth stocks that offered hopes of robust capital gains but little or nothing in the way of dividends. In this respect, Boomers who grew up on Microsoft Corp. software may mimic Microsoft's own evolution from go-go growth stock to a stodgy dividend-paying component of the Dow Jones industrial average.
It could be, however, that this move to dividends will reap an unexpected bonus: Gains for the stocks Boomers choose because of growing demand for a finite number of decent-yielding stocks.
All of which is good timing for a useful new book on this topic: Dividend Stocks for Dummies, by U.S. financial journalist Lawrence Carrel.
I'd say dividend investing is for smart investors, not dummies. The book is Americancentric, but not entirely so. It contains a chapter on international investing, but other chapters focusing on the major economic sectors also list some well-known Canadian names.
Besides, with the end of the 30% foreign content for Canadian registered plans, the world is our oyster. Such American blue chips as Procter & Gamble, Johnson & Johnson, IBM and others all deserve a place in our portfolios.
There is even more reason because our market is notoriously concentrated in just three sectors of the economy: financial services, energy and materials. We must look to the United States for consumer stocks, health care and technology. All but the latter tend to pay steady and rising dividends. The largest U.S. stocks are dividend payers operating on the global stage. Sales are generated as much from overseas and emerging markets as from the U.S. market.
The Successful Investor publisher Patrick McKeough often counsels Canadians to hold at least 25% of their portfolios in quality U.S. stocks and to spread their money across the major economic sectors. Conveniently, those sectors -- utility, energy, telecommunications, consumer goods and financial -- each get a chapter in Part III of the book: Exploring Income-Generating Industries. Each chapter ends with a list of stocks Carrel suggests should be considered, complete with ticker symbol, dividend and annual yield as of the end of 2009.
His 13 financial stocks include four of Canada's big banks -- all but Bank of Montreal. His list of 12 telecom stocks includes BCE Inc., whose dividend is 6.3%. A sidebar is devoted to Canada's royalty trusts and income trusts. Because they're losing their tax-free status in 2011, Carrel's recommendation is to pass on them.
But it's the sectors not represented in Canada, such as consumer goods, that Boomers should focus on. He lists 26 consumer-goods firms, with dividend yields ranging from a low of 2.5% for Hasbro to a high of 11.4% for Vector Group.
The book provides a good introduction to ADRs (American depositary receipts), a convenient way to get exposure to foreign stocks through U.S. exchanges. There's plenty of material on dividend reinvestment plans (DRIPS), exchange-traded funds (ETFs), portfolio construction and more.
Some sections get overly technical; they may appeal to true stock-pickers but can be glossed over if you prefer to avoid the "loser's game" and index all but the few high-yielding blue chips he focuses on.
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