`Safe' holdings get a new look

Stability: That and a nice yield are still coveted, but pairing them isn't easy.

Dollars & Sense

October 28, 2001|By TaNoah Morgan | TaNoah Morgan,SUN STAFF

Our new economy, money managers say, has all but erased the notion of so-called "widows-and-orphans" stocks - safe and stable, high-yielding investments that in the past put food on the table and simplified money matters for retirees and others.

As investors have shied away en masse from big dividends in pursuit of a better stock price, and once-regulated industries such as energy are charting new ground as states deregulate, investors in need of stable income will have to diversify widely or look to less risky, but lower-yielding, investments such as government bonds, local money managers say.

"I'm not sure you can identify any stock or any industry and say a conservative investor can be safe," said David L. Donabedian, a portfolio manager for Pell Rudman Trust Co. "It may just be that in the global economy, things change so fast that you really can't assume that any investment is safe."

Utility companies, banks, telephone, insurance and real estate investment trusts were once places to which investors could direct their retirement cash and look to live happily ever after, collecting dividends at rates of up to 5 percent, sometimes even more. They were considered safe because they provided services as necessary as burial - heat, power and communication, banking and business leasing would always be basics of the American landscape. They still do, but the rules have changed, the managers say.

Deregulation in the telecommunications and utilities industries sets the futures of those companies on the same uncertain economic seas as retailers. Behemoth companies have been broken into pieces - some less profitable than others. And for the sake of propping up stock prices, the dividends that retirees so eagerly awaited were sacrificed, the managers said.

"If you looked at the stocks people would've thrown out there as widows-and-orphans stock, a lot of those companies have been knocked off their pedestal," Donabedian said. "In some cases, investors have lost a lot of money."

In the past year, the average yield for the S&P 500 was only 1.37 percent. AT&T Corp. for the past year barely had a dividend with an annual yield of 0.84 percent, and Bell South Corp. had a yield of 1.99 percent. Citigroup Inc. paid a paltry 1.38 percent. A target yield for retirees is 3 percent to 4 percent, the managers say.

John Slaughter, first vice president with Morgan Stanley, pointed to exchange-traded funds as a possible alternative, combining less-volatile investments with good dividends and yields that can keep pace with inflation.

ETFs are similar to mutual funds in that they group certain companies with an objective l in mind - capital preservation, for example.

But, unlike open-end mutual funds, their shares trade on stock exchanges, making them available to consumers without hefty management fees. Investors pay commissions to buy or sell, as they do with common stock, but expenses are low, and there are no "loads," as with many mutual funds.

"It's a good substitute because you're not looking for one company to provide all their earnings to you," he said. "You can pick one for any strategy. All you need is a brokerage account, so it's just like buying Coca-Cola."

There are more than 500 such funds covering specific market sectors and certain countries, and there are index-linked funds, such as the ones that mimic the performance of the S&P 500. Some also focus on municipal bonds and yield tax-free dollars.

"What's not to like? You don't have to pay commissions; there's no load; you can buy on any business day; you can sell on any business day; and it invests in the areas you like," Slaughter said. "I've found them very helpful to reduce volatility in a portfolio."

Slaughter said ETF may be even more attractive to investors after the attacks of Sept. 11.

"A lot of people are looking for diversification now," he said. "ETFs can show nice baskets of municipal bonds or corporate bonds. The No. 1 - the S &P 500 is up since this terrorist activity. A lot of people are saying let's grab the S&P because it's a significant bargain."

Some market managers also are recommending bonds of varying types and maturities for preserving capital and staving off inflation.

Lyle Benson, president of the financial planning firm L.K. Benson & Co., said having a good mix of bonds in a portfolio will help maintain a cash flow through difficult economic times.

"When stocks have a bad year, typically bonds will perform better," he said. "It really smooths out the overall flow."

Benson said retirees also should look at their total financial picture and evaluate their mix of stocks, bonds and cash. Having a year's living expenses readily available also helps prevent having to lose money by cashing in on stocks in a bear market.

"It's always better to have that reserve sitting there to ride out a bad market," he said.

LeCount R. Davis, executive principal of LRD Management Group, warned retirees that when figuring out their investment mix they should consider the fact that people are living longer. The stock market is still a better bet for long-term investors, he said, and with people living longer, age 60 may not be the time to tie up a lifetime of investments in low-yielding bonds.

"Your money has got to work for you while you're in retirement," he said. "If you've got a 17- to 20-year time horizon, inflation could go up much higher than 2 [percent] to 3 percent."

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