Finding Lost Assets: Treasure Hunt (bankrate.com)

5 tips for finding unclaimed property
By Sonya Stinson • Bankrate.com



Where to find lost loot
Are you thinking that you could sure use that electric company security deposit you left behind the last time you moved? Or, maybe you found a safe-deposit box key in the bottom of a drawer but don't have the vaguest recollection of where the box might be and what's in it.

There may still be a way for you to get your hands on those assets.

For just about every category of unclaimed property, there is a government lost-and-found department. You can usually search for and retrieve your missing property for free by going directly to the agency responsible for its safekeeping. Based on a review of several government agency websites, the process typically involves looking for your name on a list, completing a claim form, having it notarized and presenting some type of documentation proving you are the rightful owner of the assets.

Here are five examples of the kind of lost loot that might turn up when you start searching.


Property is held in state repositories

All U.S. states and territories and the District of Columbia have programs that help owners of unclaimed property find those assets. According to the National Association of Unclaimed Property Administrators, there is at least $32.8 billion worth of unclaimed property in state custody.

The list includes checking and savings accounts, stocks, insurance payments, annuities, utility security deposits, mineral royalty payments and a host of other things you may have forgotten you owned or didn't know were worth anything. Besides assets that come directly from financial accounts, state-held property also may include proceeds from the sale of stocks and bonds, or from safe-deposit box contents sold at auction when it became impractical to store them.

The NAUPA website has links to every state's department in charge of unclaimed property. It also links to MissingMoney.com, a national website in which most states participate.

"If you've moved around a lot, that may be convenient, instead of checking several different states," says NAUPA President John Gabriel. "But if you've pretty much been in one or two states only, it's easier to go directly to those states -- especially if your name is common -- so you don't have to filter through a bunch of (unrelated) stuff."


Find unredeemed savings bonds
If you own or have inherited a matured U.S. savings bond that you never got around to cashing, you may be able to redeem it by going to Treasury Hunt, the U.S. Treasury Department's searchable database.

The Treasury is currently holding about $16.4 billion in matured, unredeemed U.S. savings bonds, says Joyce Harris, director of public and legislative affairs for the department's Bureau of the Public Debt.

Only Series E bonds issued in 1974 and after are included in the database. If you are the heir to the original owner of the bond, you'll need to supply the owner's Social Security number and legal documentation of your relationship to that person to get the unclaimed property. For other types of bonds, Harris says you can fill out a form from the website and mail it in.


Finding accounts from shuttered banks
If you had an account with a bank or savings and loan that was closed by a regulatory agency between January 1989 and June 28, 1993, the Federal Deposit Insurance Corp. may have some money with your name on it. Unclaimed insured deposits are available for as long as the institution is still under FDIC receivership. You may claim a dividend check for an uninsured portion of a deposit after that period if the U.S. Postal Service returned the check as undeliverable. Here's where to find out if you're on the FDIC's unclaimed funds list.

"In the mid '90s, there was a change in the law, (which is) why our database goes only until June 28, 1993," says FDIC spokesman David Barr. "Now, when a bank fails, any unclaimed funds on hand 18 months after the closing are returned to the FDIC, (which) then turns them over to the individual state unclaimed property bureaus."

The National Credit Union Administration's Asset Management and Assistance Center in Austin, Texas, is in charge of paying out members' share accounts whenever a federally insured credit union is liquidated. You can access a list of unclaimed deposits online.


Get your tax refund
Say your income tax refund check got lost in the mail or was returned as undeliverable because you moved. To find out how to get your unclaimed tax refund back, use the IRS search tool that's aptly named Where's My Refund?

You can file a claim to replace a lost, stolen or destroyed refund check once after 28 days have passed since the IRS mailed the check. You may also be able to change your address online to get an undeliverable check resent.

To get information about your refund, you'll have to plug in your Social Security number, filing status and the amount of refund due.

You may also be wondering about a state tax refund. In many states, unclaimed state tax refunds are handled by that state's department of revenue.

The database will only contain information from your most recent tax return. Your chance to claim an old undeliverable refund check expires once you have filed a return for the current tax year, according to the IRS.


Find old pension benefits
If you had a pension plan with a company that went out of business and you haven't heard anything about what happened to your unclaimed benefits, check the missing participants' listing of the Pension Benefit Guaranty Corp.

The PBGC is a federal corporation created to insure private employers' defined-benefit plans. Its database does not include profit-sharing and 401(k) plans.

For 401(k)s, profit-sharing plans and IRAs, you might check the website of the National Registry of Unclaimed Retirement Benefits, which offers free searches of its database.

The payoff for your search could come in the form of an annuity that your former employer bought from a private insurance firm -- money the company deposited in a bank or benefits that PBGC pays you if the company transferred its pension funds to the agency when it closed, according to the PBGC website. You may also file a claim if you are the survivor of the worker who was entitled to the benefits.


Sonya Stinson is a freelance writer from New Orleans.
Posted: Dec. 28, 2010

Dividend Paying Stocks (WSJ)

Looking for Yield? Try Stocks
June 25, 2011

The stock market is feeling a great deal like Federal Reserve chief Ben Bernanke's news conference this past week: a long, hard, eyelid-heavy slog.

The Dow Jones Industrial Average, for all its herking and jerking, is up a scant 3.1% at midyear. The Nasdaq Composite is essentially unchanged.

In a grinding market, a smart strategy involves hunting for yield—getting paid to wait. There isn't much yield in Treasurys. Cash isn't paying anything. And municipal bonds face uncertainty as governments work feverishly to get budgets back in order with varying degrees of success.

That means, paradoxically, that the stock market is the best place for yield hunters right now. And thankfully, there isn't any shortage of blue-chip stocks sporting strong dividend yields. (The dividend yield is the company's annual dividend payout divided by its share price.)

So, what makes for a good dividend yield? One simple benchmark is the 10-year Treasury, which currently yields about 2.9%. It isn't hard to find stocks that yield more than 10-year Treasurys, and the tax treatment for dividend income (15%) is better than tax treatment for Treasury coupon payments (as high as 35%). Dividend-focused investors also should look for stocks that have superior yields to the Standard & Poor's 500-stock index, currently about 2%.

Dividends have long been part of a prudent investment strategy. Since 1926, about 40% of the total return of the S&P 500 has come from dividends. The dividend yield on the S&P 500 rose to 5.53% in 1979, but then declined steadily, falling to 1.14% in 1999 before starting to edge higher.

Some will note that dividend yields rise as stock prices fall, and that sometimes a high dividend yield can indicate bigger problems ahead. For instance, bank stocks sported strong yields before the financial crisis broke in 2008. But once the calamity struck, banks (and others) severely slashed or eliminated dividend payouts to preserve capital.

The elimination of dividends during the financial crisis underscores a separate issue: Dividends aren't guaranteed. Companies need to generate excess cash to keep paying them.

This time, the backdrop for dividends looks strong. The companies in the S&P 500 have a record $1 trillion in cash, and continue to generate lots of it. Analysts expect earnings for the second quarter to rise by 14.1%, according to FactSet, a data provider.

"U.S. companies seem in excellent shape from a liquidity perspective, as free cash flow per share remains in a secular uptrend," says Brian Belski, chief strategist at Oppenheimer & Co. He adds that stock investors, frustrated by the go-nowhere market and very low fixed-income yields, will increasingly "consider equities as a yield alternative."

Utilities are a favorite yield play, especially since they have a history of steady stock-market performance. Consolidated Edison (4.6%), American Electric Power (4.9%) and Duke Energy (5.4%) are among the higher-yielding utilities.

But what is surprising about the current environment is how many nonutilities are paying outsize dividends. Currently 11 of the Dow's 30 components have yields north of the 10-year Treasury's 2.9%, topped by AT&T, with a dividend yield of 5.7%.

Merck and Pfizer each have dividend payouts of about 4%. Tech giant Intel is sporting a healthy yield of nearly 4%, even as it promises 20% earnings growth and is buying back shares. That is what a cash hoard can accomplish.

Some companies within the Dow below the 3% threshold, such as 3M (2.4%) and Coca-Cola (2.9%), have a history of increasing dividend payouts. Both are members of what S&P calls the Dividend Aristocrats, companies that have increased payouts every year going back 25 years. Other members include Clorox (3.6%), McDonald's (2.9%) and Target (2.6%).

Not only are the Aristocrats paying a decent yield, their price performance also is outpacing the S&P 500. The S&P 500 Dividend Aristocrats Index has a total return of 5.7% and a price return of 4.3% year to date. The S&P 500 has a total return of a bit more than 3% and a price return of 2.3%.

Telecommunications stocks like AT&T are among the best payers in the market right now. Vodafone Group and Verizon Communications both are paying dividend yields of more than 5%.

One group that has drawn a lot of value-investor attention of late that isn't participating in the dividend game: the banks. Some, such as J.P. Morgan Chase and U.S. Bancorp, have raised or initiated dividends, providing investors with yields around 2%. But others, including Goldman Sachs Group, Morgan Stanley, Bank of America and Citigroup, pay more paltry yields.

Given the likelihood of a drifting and at times scary market, investors will rest easier if their accounts are collecting the plentiful dividends on offer.

—Dave Kansas blogs at The Wall Street Journal's MarketBeat. Email: dave.kansas@wsj.com

The Best Annuities (Barrons)

Barron's Cover | SATURDAY, JUNE 18, 2011
Best Annuities
By KAREN HUBE

Special Report -- Retirement: With their steady income payments, annuities are suddenly hot.

Shortly after George Altmeyer of Bucks County, Pa., retired from his senior-management job at a large industrial company, half his stock portfolio vanished. It was wiped out by the stock-market crash of 2008. But Altmeyer, 67, never lost a night's sleep, and he doesn't worry about whether he will run out of retirement income. His secret? He bought two kinds of annuities in 2007. "They give this blanket of security—it doesn't matter what the stock market does, really," he says.

Annuities, maligned for years as expensive gimmicks, are now shining in a big way. The basic features that critics used to blast as too costly—downside protection and guaranteed payouts—have paid off spectacularly for folks like Altmeyer through the stock-market collapse and the subsequent volatility.

Now, as baby boomers approach retirement with fresh memories of big market losses, many sharp financial advisors are recommending an annuity as an important part of an income plan. "We've come from thinking that stocks and bonds were the answer to everything, to worrying about how to arrange for monthly income to age 80 and beyond," says Fred Reish, a lawyer who specializes in retirement issues at Drinker Biddle & Reath in Los Angeles. "Annuities can take away that worry."


Little wonder that annuities are getting a fresh look. Though the effective returns are hardly eye-popping—often just a shade above those of certificates of deposit—annuities offer some real comfort to retirees.

With that in mind, Barron's has identified what we think are the 25 best annuities. As you can see in the table nearby, we've picked five annuities from each of five categories. We sized up the field mostly by returns, costs and strength of the insurance companies behind the products. As of last week, each of the annuities on our list was doing well by all three measures.

IN ITS MOST basic form, an annuity is a contract with an insurance company that converts your lump sum into a stream of guaranteed income, for either a set period or for your lifetime. Its primary purpose is to hedge against longevity risk—the risk that you outlive your income. While annuities date back centuries, longevity risk is a growing modern concern. Consider: In 1930, retirement lasted three to seven years, with people dying at an average age of 60. As life expectancies grew longer over subsequent years, most workers could depend on a company pension to carry them through retirement.

Now, retirements last a quarter century or more, and pensions are a dying breed, so investors are left to their own devices to arrange for income to supplement Social Security payments. At age 65, the average life expectancy is 85 for a man and 88 for a woman. But what haunts folks planning for retirement are the odds of living much longer. There's a 25% chance of living past 90, and for a couple, there's a 25% chance that one spouse will live to age 95.

While that is a risk annuities can address, they traditionally have introduced other problems in the process. The biggest: Once you hand over a lump sum, you could never get the money back, and if you died prematurely, the insurance company, rather than your heirs, got what was left of your money.

But over the past decade, insurers have become much more flexible, offering long menus of riders and options to give investors liquidity, exit opportunities and certainty that their heirs are first in line for the assets, not the insurer.

The number of different annuities has mushroomed: There are now 1,600 iterations of the product. These include both variable annuities, whose growth fluctuates based on underlying stock and bond investments, and fixed annuities, which are pegged to an interest rate, similar to a certificate of deposit or a bond. The payouts can be either immediate—starting right now—or deferred, starting at a specified later date.

The most popular of all is the deferred variable annuity, the last of the five categories shown on our list. It accounted for 63% of the annuity industry's $221 billion in sales last year, with investors choosing from a range of underlying stock- and bond-fund investment options. Money in these products grows tax-deferred, an advantage over a mutual fund. On the date you specify, the value is "annuitized," or turned into steady payouts. The better the underlying investments have done, the higher the payouts. The payouts are taxed as ordinary income.

In a plain-vanilla deferred variable annuity, negative returns are possible, but the industry has created various options to put investors at ease, such as riders that guarantee certain levels of income upon retirement. "Eighty percent of the time people buy an income rider," says Robert E. Sollmann, executive vice president of retirement products at MetLife.

Also popular are guaranteed minimum death benefits. Almost all deferred variable annuities sold include the basic kind: a guarantee that, if the account value has lost value when the investor dies, heirs will get the full amount initially invested. Death benefits can get a lot fancier, such as guarantees that heirs get the highest value the account hit on one of its anniversaries. Between 2001 and 2003, variable annuity beneficiaries received $2.8 billion more than the account value when policy holders died earlier than expected, according to the Insured Retirement Institute.


Despite the popularity of deferred variable annuities, they aren't necessarily the best choice, financial advisors caution. Many are sold aggressively by sales agents to folks who only vaguely understand the costs and features. In fact, the fee structure can encourage unscrupulous practices.

Average fees on variable annuities are 2.33%, compared with mutual funds' 1.32%, but they can top 4%, including death-benefit fees, administrative fees and underlying mutual fund expenses.

Michael Zhuang, an advisor at MZ Capital in Washington, D.C., said an investor recently asked him to look over his variable annuity contract. "The investor thought he was paying 2% in expenses, but it was double that, " Zhuang says. "His contract was about 100 pages. Various expenses were on different pages."

However, it's entirely possible to find a lower-cost variable annuity, such as those offered by Vanguard, Fidelity, Charles Schwab or Pacific Life Insurance Co., among others, advisors say. And for investors who have maxed out contributions to a 401(k), IRA or other tax-favored savings plans, a variable deferred annuity could make sense, some advisors say.

THE PUREST OF ALL annuity products—favored most widely by advisors—is an immediate annuity. You give the insurance company a chunk of money, and it converts it right away into fixed regular payments for life or a specified period.

Some economists say they are baffled by the low level of participation in these products, given their benefits. Aside from guaranteed income, lifetime annuities actually give retirees higher regular payments than they would get if they self-managed their income stream. "Annuities provide what we economists call a mortality premium, which is basically an extra rate of return over and above what one can get from a non-annuitized asset," says Jeffrey R. Brown, a finance professor at the University of Illinois and associate director of the National Bureau of Economic Research's Center for Retirement Research.

With a basic lifetime immediate annuity, you give up assets to the insurance company if you die early. "If you live long, you win but if you don't, you lose. But you're dead," says Jean Fullerton, an advisor at WJM Financial in Bedford, N.H. But many insurers, such as New York Life and Aviva, offer guarantees that they will continue to pay the annuity for five to 25 years. If you die within this period, the payments go to your heirs.

Special features always cost extra, and with immediate annuities, the costs take the form of lower monthly payouts. For example, a 65-year-old man who puts $100,000 into an immediate annuity with lifetime payment at Pacific Life Insurance Co. would get a monthly lifetime payout of $602, according to Cannex, which tracks annuity data. If he opted for a 10-year guarantee, meaning the insurer continues to pay heirs for 10 years even if he dies before that, the monthly payment would be $590.

Rosemary Caligiuri, a financial advisor at Harvest Group Financial Services, says she likes to use immediate annuities in combination with fixed deferred annuities for her clients in retirement. In a fixed deferred annuity, assets are paid out later and grow based on underlying interest rates. The rates can be reset based on insurers' underlying investments. Or, investors can choose a fixed rate for a certain period.

You might also consider index-linked annuities, says Caligiuri, who ladders annuities to secure income in phases and diversify across insurers. These cushion the downside—you'll never have a return below zero, even in a year like 2008. On the upside, returns on these are pegged to an index, but are usually capped.

Jack Marrion, president of Advantage Compendium, which tracks indexed annuities, says over many historical periods they have proven to be better choices than either CDs or the stock market. Over the past five years through September 2010, 36 annuities offered by 19 insurers had an average annual return of 3.9%, compared with a one-year CD's 2.8%, a five-year CD's 3.8% and the S&P 500 index's return of 0.65%, according to a study by Marrion.

Periodically, usually each year, an insurer can reset its caps or other terms. "If a company won't give you its renewal history, don't do business with them," he says. Also consider the financial-strength ratings by A.M. Best, Standard & Poor's and other agencies.

If you choose wisely, you'll end up with a nice income flow, relatively low fees and minimal risk of problems with the provider. That's saying a lot in these uncertain times.

.E-mail: editors@barrons.com

Copyright 2011 Dow Jones & Company, Inc.

Beware Penny Stocks (WSJ)

JUNE 7, 2011, 10:15 A.M. ET.

SEC Suspends 17 OTC-Traded Stocks, Questions Disclosures
.


DOW JONES NEWSWIRES

The Securities and Exchange Commission suspended 17 microcap stocks that trade on the over-the-counter market, citing questions about the adequacy and accuracy of publicly disclosed information.

"They may be called penny stocks, but victims of microcap fraud can suffer devastating losses," said Robert Khuzami, director of the SEC's division of enforcement. "The SEC's new Microcap Fraud Working Group is targeting the insiders and promoters, as well as the transfer agents, attorneys, auditors, broker-dealers, and other gatekeepers who flourish in the shadows of this less-than-transparent market."

The 17 companies suspended are American Pacific Rim Commerce Group (APRM), Anywhere MD Inc. (ANWM), Calypso Wireless Inc. (CLYW), Cascadia Investments Inc. (CDIV), CytoGenix Inc. (CYGX), Emerging Healthcare Solutions Inc. (EHSO), Evolution Solar Corp. (EVSO), Global Resource Corp. (GBRC), Go Solar USA Inc. (GSLO), Kore Nutrition Inc. (KORE), Laidlaw Energy Group Inc. (LLEG), Mind Technologies Inc. (METK), Montvale Technologies Inc. (IVVI), MSGI Security Solutions Inc. (MSGI), Prime Star Group Inc. (PSGI), Solar Park Initiatives Inc. (SOPV) and U.S. Oil & Gas Corp. (USOG).

The trading suspensions result from a joint effort among several SEC regional offices, its Office of Market Intelligence and the new Microcap Fraud Working Group, which looks to detect fraud involving microcap securities.

The SEC said stock-touting websites, twitter users and often anonymous individuals posting to message boards have influenced the investment decisions of the public, which often doesn't have adequate information about the securities.

As an example, the SEC said Calypso Wireless hasn't filed periodic reports since February 2008. In spite of this, the shares rose to an intra-day high of 17 cents on Sept. 24, the same day a stock-promoting website allegedly encouraged investors to continue buying the stock. The stock traded at 4 cents on Sept. 21.

-By Melodie Warner, Dow Jones Newswires; 212-416-2283; melodie.warner@dowjones.com

Why You Should Wait: Fixed Annuity Rates are Still Too Low (Morningstar)

The Error-Proof Portfolio:

For Annuities, Timing Is Key

By Christine Benz | 04-12-10

Many investors' hackles go up when you say the word "annuity." They immediately think of variable annuities, many of which are pricey and often sold, not bought. (When the TV program Dateline is using hidden cameras to catch salespeople in the act of peddling inappropriate products to unwitting seniors, it's fair to say that an industry has an image problem.)


But plain-vanilla single-premium immediate annuities deserve more respect. The concept is as simple as it can be: You give the insurance company a slice of your retirement portfolio, and the insurer, in turn, sends you back a stream of income for the rest of your life. You can layer on additional bells and whistles--such as survivor benefits in case you die early in the life of the contract--but they will dramatically decrease the payout you'll receive.


The Value Proposition
The idea of using annuities as a slice of retiree portfolios has been gaining traction in the financial-planning community and among mainstream investors during the last few years. Against the backdrop of a rocky stock market and a shrinking number of defined-benefit plans, annuities' promise of a certain payout holds a lot of appeal. And with bond yields still exceptionally low right now, annuities are also attractive in that they generally deliver a higher payout than what a retiree would receive via a traditional high-quality fixed-income investment.


Annuities also help address the more basic problem that--regardless of the market environment--we're all planning for an unknowable time horizon. None of us knows how long we'll live. And increasing life spans increase the risk that a portfolio of stocks and bonds (that is, one without an annuity) might not last throughout a retiree's lifetime, thereby burnishing annuities' appeal.


Problematic Timing
For all of these reasons, it's become conventional wisdom that SPIAs should be part of retirees' toolkits. Unfortunately, fixed annuities are catching on at what could, in hindsight, be the worst possible time. That's because the payout you receive from an annuity is based on two key factors: 1) the expected life spans of other annuityholders and the likelihood that some of them will die before actuarial tables would suggest; and 2) the interest rate that the insurance company can expect to earn on your money.


The first factor--in essence, the fact that some unlucky people in the annuity pool will die before their time--is why annuities can provide a higher payout than fixed-rate investments. In a pool of hundreds of people, the statisticians know that at least some of the folks who should live into their 80s and 90s will expire in their 60s and 70s instead. Those early decedents will have paid more into the annuity than they've gotten out. Other annuitants, meanwhile, will live well beyond what the actuarial tables would suggest, enabling them to receive more than they've put into their retirement.


The wrinkle is that people are living longer, and insurance companies are having to spread the money in the annuity pool over more and more very long lives, so increasing longevity will have the side effect of shrinking the payouts for everyone. (As a side note, an interesting body of research indicates that annuity pools include significant adverse selection--that is, the people who are most likely to buy an annuity are also likely to live much longer than actuarial tables would suggest. That may be because those most attracted to annuities may have longevity in their families, or perhaps there's a correlation with wealth and better health care.)


That trend will provide a long-term headwind for annuities, but it shouldn't have a significant impact on the timing of when you buy an annuity. The other component of annuity payouts--the interest rate the insurance company can expect to earn on your money--is more problematic. If you buy an annuity today, the currently ultra-low interest-rate environment will depress the payout you receive. (It's not a perfect analogy, but it's somewhat akin to buying a long-term bond with a very low coupon. Rates may go up in the future, but you'll be stuck with your low payout.) The average fixed annuity rate plunged from 5.55% to 3.94% between December 2008 and December 2009, according to National Underwriter.

What to Do?
For those who like the concept of an annuity but are concerned about the effect of low interest rates on payouts, one possibility is to ladder your investments, essentially dollar-cost averaging in to mitigate the risk of buying an annuity when interest rates are at a secular low. If, for example, you were planning to put $100,000 into an annuity overall, you could invest $20,000 into five annuities during the next five years. Such a program, while not particularly simple or streamlined, would also have a beneficial side effect in that it would give you the opportunity to diversify your investments across different insurance companies, thereby offsetting the risk that an insurance company would have difficulty meeting its obligations.


Alternatively, a prospective annuity purchaser could simply wait until fixed-income interest rates head back up toward historical norms. While fixed-income yields have recently begun to climb, they're still extremely low relative to historic norms.

How to Create Your Own Pension ( NY Times, Sunday Business Section)

June 4, 2011
The Annuity Puzzle
By RICHARD H. THALER

IMAGINE a set of 65-year-old identical twins who plan to retire this summer after long careers. We’ll call them Dave and Ron. They have worked for different employers and have accumulated retirement benefits worth the same amount in dollars, but the benefits won’t be paid out the same way.

Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principal he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.

Who is likely to be happier right now? Dave or Ron?

If this question seems a no-brainer, welcome to the club. Nearly everyone seems to prefer the certainty of Dave’s pension to Ron’s complex options.

But here’s the rub: Although people like Dave who have them tend to love them, old-fashioned “defined benefit” pensions are a vanishing breed. On the other hand, people like Ron — with defined-contribution plans like 401(k)s — can transform their uncertainty into a guaranteed monthly income stream that mirrors the payouts of a traditional pension plan. They can do so by buying an annuity — but when offered the chance, nearly everyone declines.

Economists call this the “annuity puzzle.” Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios. One reason is that those who buy annuities and die early end up subsidizing those who die later.

So, why don’t more people buy annuities with their 401(k) dollars?

Here’s one part of the answer: Some people think that buying an annuity is in some way a bad deal for their heirs. But that need not be true. First of all, a retiree can decide to set aside some portion of a retirement nest egg for bequests, either immediately or at a later date. Second, if a retiree chooses to manage his or her own money, the heirs may face the following possibilities: Either they get financially “lucky” and the parent dies young, leaving a bequest, or they are financially “unlucky,” meaning that the parent lives a long life, and the heirs take on the burden of support. If you have aging parents, you might ask yourself how much you’d be willing to pay to insure that you will never have to figure out how to explain to your spouse, or whomever you may be living with, that your mother is moving in.

There are other explanations for the unpopularity of annuities, but I think two are especially important. The first is that buying one can be scary and complicated. Workers have become accustomed to having their employers narrow their set of choices to a manageable few, whether in their 401(k) plans or in their choice of health and life insurance providers. By contrast, very few 401(k)’s offer a specific annuity option that has been blessed by the company’s human resources department. Shopping for an annuity with hundreds of thousands of dollars at stake can be daunting, even for an economist.

The second problem is more psychological. Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even. But, as the example of Dave and Ron shows, it’s is the decision to self-manage your retirement wealth that is the risky one.

The most complex and unknowable part of that risk is in predicting how long you will live. Even if there are no medical advances in the coming years, according to the Social Security Administration, a man turning 65 now has almost a 20 percent chance of living to 90, and a woman at this age has nearly a one-third chance. This means that a husband who retires when his wife is 65 ought to include in his plans a one-third chance that his wife will live for 25 more years. (A “joint and survivor” annuity that pays until both members of a couple die is the only way I know for those who are not wealthy to confidently solve this problem.)

An annuity can also help people with another important decision: when to retire. It’s hard to have any idea of how much money is enough to finance an appropriate lifestyle in retirement. But if a lump sum is translated into a monthly income, it’s much easier to determine whether you have enough put away to afford to stop working. If you decide, for example, that you can get by on 70 percent of preretirement income, you can just keep working until you have accrued that level of benefits.

IN the absence of annuities, there is reason to worry that many workers are having trouble with this decision. Over the last 60 years, the Bureau of Labor Statistics reports that the average age at which Americans retire has trended downward by more than five years, from 66.9 to 61.6. Of course, there is nothing wrong with choosing to retire a bit earlier, but over the same period, live expectancy has risen by four years and will likely continue to climb, meaning that retirees have to fund at least an additional nine years of retirement. Those who manage their own retirement assets can only hope that they have saved enough.

Annuities may make some of these issues easier to solve, but few Americans actually choose to buy them. Whether the cause is a possibly rational fear of the viability of insurance companies, or misconceptions about whether annuities increase rather than decrease risk, the market hasn’t figured out how to sell these products successfully. Might there be a role for government? Tune in next time for some thoughts on that question.


Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago. He is also an academic adviser to the Allianz Global Investors Center for Behavioral Finance, a part of Allianz, which sells financial products including annuities. The company was not consulted for this column.

Dividend Paying Stocks (NY Times)

June 3, 2011
Assessing the Value of Owning Dividend-Paying Stocks
By PAUL SULLIVAN

THE first security I was ever aware of was a dividend-paying stock, the AT&T shares that my grandfather, a retired postman, owned when I was little. Those shares along with some other dividend-paying stocks formed the foundation of his nest egg. By reinvesting his dividends, he was able to amass sizable savings for someone who probably never earned more than $20,000 a year.

So when I heard recently that some advisers were using dividend-paying stocks to coax people who still hold their money in cash or low-yielding bonds back into the equity markets, my ears perked up.

After all, dividend-paying stocks were largely ignored in the high-growth years for much of the past two decades. Companies that pay dividends, like Coca-Cola, McDonald’s, Caterpillar and Johnson & Johnson, are established corporations with none of the go-go appeal of a technology start-up.

On the other hand, the people running those start-ups often had (and still do have) a good portion of their compensation tied up in stock options. And those options become more attractive the higher the stock price goes, making growth much more important than returning any capital to investors through dividends.

And until President George W. Bush’s tax changes in 2003, dividends were taxed at ordinary income tax rates, not the lower capital gains rate.

“The way the tax code was written, it made companies go for capital gains over dividends,” said Jason Trennert, managing director at Strategas Research Partners. “It made people make imprudent decisions. Dividends remind executives four times a year that it’s not their company.”

Mr. Trennert said that many clients of Strategas, which has headquarters in New York, are reporting increased interest in dividend-paying stocks. That could produce a chicken and egg situation of companies increasing or initiating dividends if investors are asking for them. The advisers and analysts I spoke to who favored dividend-paying stocks as a crucial part of anyone’s portfolio were divided into two camps.

The first offered more sentimental reasons. Kenneth Kamen, president of Mercadien Asset Management in Hamilton, N.J., said he had a relative in his 80s who has held a handful of dividend-paying stocks since the 1970s. Until recently, he reinvested the dividends to buy more shares. But with the stocks now worth more than $1 million and with the average dividend yield of 4.5 percent, the relative stopped reinvesting the dividends and now receives $61,000 a year in income.

Mr. Kamen said his relative’s rationale back in the 1970s is still sound: if the company paid a dividend, it was probably sound. “He said, ‘We didn’t have access to all this information,’ ” Mr. Kamen said. “Dividend-paying stocks represented an interesting form of research for him. You can’t fake cash.”

The second group considers these stocks to be a counterweight to portfolios excessively weighted toward supersafe investments, since the performance of those investments is going to lag over time.

Catherine Avery, who runs an investment advisory company under her name in New Canaan, Conn., said she is telling her clients that 54 percent of the returns in stocks since 1928 have come from dividends. Ms. Avery also notes that companies like Johnson & Johnson and Emerson Electric have maintained unbroken streaks of increasing their dividends — 49 years in the case of Johnson & Johnson and 53 years for Emerson.

She said she has been making these points to encourage clients who have resisted investing in equities since the recession to buy stocks again. “They missed two big years in the markets,” she said. “Now we’re reaching out to people and telling them this is your dead last chance to get back into the market at attractive valuations.”

The reality, though, is most people own dividend-paying stocks even if they don’t think of them in those terms. At the end of 2010, 373 companies in the Standard & Poor’s 500-stock index paid dividends. That is nearly 75 percent of the companies in the index that most investors track.

What follows is a more detailed assessment of the pros and cons of owning dividend-paying stocks.

THE UPSIDES All things being equal, dividend-paying stocks have several advantages.

Devotees like to point to their stability over the long term. Haverford Trust, which manages $6.5 billion, has all $3.5 billion of its equity allocation in dividend-paying stocks, said Hank Smith, chief investment officer of Haverford, in Radnor, Pa.

If a client 30 years ago had put $1,000 each into Johnson & Johnson, Coca-Cola and Procter & Gamble and reinvested the dividends, the firm calculates that that $3,000 would be worth $223,982 today. But over that same period, $3,000 invested in the S.& P. 500 would now be worth $64,668, and that money in 30-year Treasury bonds would have grown to $89,399, according to S.& P. indexes.

These exercises are always eye-opening but selective. Enron, WorldCom and Lehman Brothers also paid dividends to shareholders, who have long since seen the value of their holdings go to zero.

Mr. Smith argued that for passive, long-term investors, which many people are, dividend-paying stocks offer more comfort. “If you’re buying a stock for its dividend yield, why should you care about the day-to-day fluctuation of the stock price as long as it’s paying its dividend?” he said. “Do bond investors worry about fluctuation day to day?”

While these stocks are going to lag behind any big rally, they are also going to fall more slowly. “During the bear market, in 2008, when the S.& P. was off 37 percent, we were off 25 percent,” Mr. Smith said.

These stocks also offer at least some sort of hedge against inflation. A typical high-quality corporate bond is going to pay the same yield today as it will in 10 years. That could be a problem if the rate of inflation increases since that would effectively erode the value of the fixed coupon.

With dividend-paying stocks, companies could raise prices and then increase the dividends to keep pace with inflation. “Dividends play a hybrid role that they didn’t in the past,” Mr. Kamen said. “You don’t get that in bonds.”

The tradeoff is a stock’s price could swing widely, whereas a high-quality bond would stay the course.

DOWNSIDES The two big risks come from how quickly the economy grows — and thus how much cash companies have to pay dividends — and what policy makers do with taxes.

When the extension to the Bush tax codes expires in 2012, dividends could again be taxed at the ordinary income tax rate. This is how they were taxed for much for the bull market of the 1980s and 1990s.

“It’s a concern of ours,” Ms. Avery said. But, she added, “we believe there is enough cash sitting on corporate balance sheets that they do have the ability to increase those dividends to make the end product more attractive to investors.”

There is third, short-term concern. Right now, low interest rates make dividends attractive. As interest rates rise, which they will eventually, dividend-paying stocks become less attractive because their yields are unlikely to keep pace with the yields from high-quality corporate debt.

Jeremy Zirin, chief United States equity strategist at UBS Wealth Management, which has headquarters in New York, said one way to measure this is to look at the relationship between average dividend yield and the yield on the 10-year Treasury note. Right now, the dividend yield is about 2 percent while the 10-year Treasury is paying 3.5 percent.

This means these dividends are about 65 percent of the yield of Treasuries. Historically, when that ratio dips below 50 percent, dividend-paying stocks become less attractive. “We have a ways to go,” Mr. Zirin said.

But of course, Mr. Kamen’s relative would say that a decrease in the price of a dividend-paying stock is not all bad: it means the reinvestment plan buys more shares. That was exactly what my grandfather did.

The Best Dividend Stocks (Motley Fool)

The World's Best Dividend Portfolio


Jim Royal
June 2, 2011


In the next few days, I'm going to put $10,000 of my own portfolio to work in 10 income-producing stocks, which I'll reveal below. Altogether, these names offer more than triple the yield of the average S&P stock. And I'll also show you how to access 13 more high-yielding companies so that you can build your own dividend dynamo for years to come.

Fool.com readers have clamored for coverage of some of the juiciest dividend stocks out there, and I'm here to deliver what I call the world's best dividend portfolio. I'll even back up my words with some cold, hard cash. I believe so strongly in the long-term prospects of the 10 companies below that I promise not to sell them for at least the next 12 months. In fact, I expect they'll become the cornerstones of my dividend portfolio for years.

Read on to find out where my money's going, because the time to act is now.

High yield vs. high growth
Over the past year we've been having a spirited debate here at Fool headquarters about dividend stocks -- does high yield beat high growth, or vice versa? I've come down solidly on the side of high yields.

Research from investment manager Tweedy, Browne shows that a high-yield portfolio offers "attractive total returns" and lower volatility. Just as important, high-yield stocks outperformed value stocks in declining markets. So you get great dividends in good times and bad, and even when things go pear-shaped for a while you've got some downside protection, too. More money and less risk -- it's hard to imagine a better combination for dividend investors.

To see how high yields can provide superior dividends, let's take a look at the outstanding dividend stock I was buying in January -- National Grid (NYSE: NGG ) . The company pays out about a 6% yield and has grown that yield at 6.9% over the last five years. Compare it to another fine and fast-growing dividend stock, Colgate-Palmolive, whose 2.6% yield has been growing at 12.8% over the last half-decade.

Colgate's dividend growth is attractive, but consider how long it would take for the two companies to offer equivalent yields if they grew at their historical rates. Sixteen years! By then each stock would be offering more than 17% yield on cost.

Since I let you in on all the details on National Grid back then, the stock has returned a dividend-adjusted 16%. Pretty good for five months. So without further ado, I'll show you what I call the world's best dividend portfolio.

The world's best dividends
The companies below all offer yields that are at least double that of the average S&P stock. While two dividend growth rates are negative because of short-term factors, I expect those companies' payouts to actually start climbing in the near future.

Company
Trailing Yield
5-Year Dividend Growth

Southern Company (NYSE: SO ) 4.7% 4.1%
Exelon (NYSE: EXC ) 5.0% 5.6%
National Grid 6.0% 6.9%
Philip Morris International (NYSE: PM ) 3.6% 9.6%*
Annaly Capital (NYSE: NLY ) 13.7% 30.2%
Frontier Communications (NYSE: FTR ) 8.5% (4.1%)
Plum Creek Timber (NYSE: PCL ) 4.2% 1.8%
Brookfield Infrastructure Partners (NYSE: BIP ) 5.0% 33.2%*
Vodafone (Nasdaq: VOD ) 5.3% 5.1%
Seaspan (NYSE: SSW ) 4.4% (12.2%)
Blended Yield 6.0% N/A

Source: Capital IQ, a division of Standard & Poor's. *2-year dividend growth, since the company was spun off in 2008.

Let's go through these names briefly to see why they comprise the world's best dividend portfolio. At the top you'll notice a strong contingent of utilities -- Southern, Exelon, and National Grid. These low-volatility names anchor the portfolio, providing mid-single-digit payouts and steady reliable increases. They make ideal choices for retirement accounts and have some broad geographic diversity. Southern and Exelon offer exposure to the U.S., while National Grid has both U.S. and U.K. operations.

Brookfield Infrastructure also offers utilities and infrastructure exposure, and was launched by one of the sharpest investment groups out there, Brookfield Asset Management. The spinoff's hard assets make it a safe haven in a troubled environment. Much the same can be said for Plum Creek, whose key product -- timber -- increases in value regardless of the economic climate. While the housing downturn has hit the company hard, it's still the largest private landowner in the United States. Plus, its dividend is treated mostly as a long-term capital gain even though this company is a real estate investment trust.

I've included two telecoms in this portfolio, Frontier and Vodafone. Again, we have geographic diversity, with Frontier operating in a wide swath of states and Vodafone calling around the world. Frontier offers a high current yield, but also the potential for increases in the payout, which it cut in 2010 in order to invest in recently acquired Verizon properties. As the company finishes making its investments, the dividend should rise. Vodafone also offers the potential for a big dividend increase, with its 45% stake in Verizon Wireless, as I explain here.

Philip Morris needs no introduction, but I'll give you a brief bio. This is the world's leading tobacco company, with 27% share of the market (excluding the U.S. and China). The company behind Marlboro, one of the world's leading brands, has broad global exposure. Because the company was spun off from Altria in 2008, it doesn't have a long dividend track record, but its former parent does. So I have every confidence that this stock will continue its generous payouts in the future.

Our final two names both offer solid long-term opportunity. Seaspan is a containership company that has promised a progressive dividend policy, meaning that the company should ramp dividends quickly in the next couple of years as it completes the build-out of its fleet. As evidence, the company bumped its payout by 50% in January. And Annaly Capital should offer a great hedge on economic malaise. If the economy continues to sputter along and interest rates remain at record lows, then this mortgage REIT will continue to reward investors handsomely. Still, the company has a great long-term dividend record, too, so forward-looking investors should be richly rewarded.