Looking to boost retirement income and to do so in a consistent manner? Think dividend-yielding stocks — but beware dividend traps. Shares that pay out dividends have a good probability of beating inflation, which is the biggest threat to fixed pools of money. They also allow clients to rely less on random capital gains as a way to pull income in retirement, said Charles Farrell, chief executive of Northstar Investment Advisors LLC. Mr. Farrell spoke on Monday at InvestmentNews' Retirement Income Summit in Chicago.
When assessing companies, Mr. Farrell referred to his dividend power ratio formula, which divides earnings growth by dividend growth. He aims for a ratio that's close to 1, signifying that earnings and dividends at a firm are growing at approximately at the same pace. A earnings/dividend ratio that's well above 1 suggests that the company isn't committed to paying out dividends that are commensurate to earnings.
Source: Investment News
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