Trends for Retirement Investing

If you’re investing for retirement or are already retired and you need your investments to make money for you, there are a few trends you absolutely have to pay attention to. Some of these are fundamental to the very process of investing.

In fact, the traditional ways we have all been taught to invest are changing. And many of the traditional investments we’ve counted on to grow our wealth are changing, too.

If you do nothing, this combination of forces may have a nasty surprise for you in a couple years’ time — and by nasty, I mean you may not have as much money as you’d like (or need).

Fortunately, there is time to make changes to adapt to this new retirement investing reality and ensure you make plenty of loot in the years to come. Let’s dive deeper into these issues…

First up are the fundamental ways we’ve always gone about investing for retirement. For years, the basic strategy has been to buy quality mutual funds (through a 401(k) plan or on your own), add money regularly, and let compounding do its work.

The problem is that most mutual funds can’t beat the S&P 500. Their high fees eat into performance.

Many mutual funds you might have in a 401(k) plan will front-load fees, meaning they charge you a set percentage right off the bat when you buy them. After that, they continue to charge annual management fees.

Check out American Funds, whose funds are popular in 401(k) plans. Many of these mutual funds charge front-load fees as high as 5.5%. They take that money right off the top when you buy a fund.

That means you are already in the hole. If the S&P 500 advances 9%, like its done so far in 2014, you’re only getting 4% of that. Add in the management fees, and you’re getting less than 3.5%.

What’s more, if you sell one of these funds too quickly, you might be charged an additional 1% or 2%. Yeah, it’s ridiculous.

But these funds don’t really exist to make money for individual investors — they exist to make money for their parent companies… companies like BlackRock, Fidelity, American Funds, and so on.

Another big problem is that all stocks don’t perform the same. Value Line reports that the average stock is up 4.4% so far this year. The S&P 500 is up 9%.

So unless a mutual fund manager is simply buying S&P 500 stocks, chances are that manager is underperforming (and charging you fees). The average hedge fund has returned 2% so far this year. That’s bad.

S&P 500 Rules

There are reasons the stocks on the S&P 500 have done better than the average stock.

For one, there’s dividends. The vast majority of stocks on the S&P 500 pay one, and historically, dividends account for ~75% of all stock market gains.

The message is clear: Stop trying to pick huge winners, and focus on stocks that pay you cash (or stock) dividends.

Another reason the S&P 500 outperforms is share buybacks. By the end of this year, the companies on the S&P 500 will have bought back around $700 million of their own stock.

Some people will tell you share buybacks are bad sign because they suggest companies don’t have anything else to do with their cash. But that’s the wrong way to look at it. Share buybacks are similar to dividends, only instead of putting money in your pocket, share buybacks increase earnings per share and encourage higher stock prices.

Barclays says that since 2008, the companies with the biggest share buyback plans have outperformed other stocks by 20%.

So the combination of dividends and share buybacks makes the S&P 500 a very attractive investment. And that’s why so many individual investors are buying S&P 500 index funds, like those offered by Vanguard. The fees are miniscule, and they give you the direct benefit of the best-performing and most stable index there is.

The first piece of advice for retirement savings is this: Put your money in a Vanguard S&P 500 index fund.

The second piece of advice: If you want to do just a little bit of extra work, you can do even better than 99% of fund managers and beat the S&P 500, too, just by picking a few solid dividend stocks to put your money in.

It doesn’t have to be hard or complicated to pick your own stocks. If you’ve read my Wealth Daily columns for a while, you know how I feel about companies like Bank of America (NYSE: BAC), Ford Motor Co. (NYSE: F), and Starbucks (NASDAQ: SBUX).

Now, if you’re interested in consistently beating the S&P 500 for years to come, here are a couple of trends you must pay attention to when selecting the right stocks.

What Will the Future Hold?

For the last 30 years, McDonald’s was among the very best dividend stocks you could own. Fast food was growing in popularity, and McDonald’s was leading the way. Few people had heard the word “organic,” and there was no obesity crisis.

But that’s changed — maybe permanently.

McDonald’s isn’t cool anymore. Chipotle (NYSE: CMG) is. We are raising a new generation of Americans who don’t eat McDonald’s food. And McDonald’s has missed enough quarterly earnings estimates that we can call it a trend — and it might be a long-term one.

How does McDonald’s grow when fewer people want to eat its food? I don’t know, and I don’t think there’s a lot of growth ahead for the company. I wouldn’t recommend the stock because I don’t think the company is in touch with what the consumer wants. And I also don’t know how it can change that.

Plenty of companies have their day in the sun and then fall by the wayside. Make sure the companies you invest in are in touch with what consumers want.

Companies like Chipotle, Starbucks, and Zoe’s Kitchen (NASDAQ: ZOES) are meeting consumers’ food demands. Even Boeing (NYSE: BA) is meeting its customers’ needs with more fuel-efficient airplanes.

There’s another trend that has some incredible long-term implications. Maybe you’ve noticed that oil prices have fallen lately…

Russia and Natural Gas

I’m not going to tell you the oil age is over. It’s not. We will be using oil — and gasoline — for a long time.

But the fall in oil prices isn’t happening in isolation. The situation in Russia, the potential for a carbon tax, renewable energy requirements for utilities, and climate change are all contributing.

And this should have a big impact on how you invest.

Russia’s economy is very likely in a recession right now. The country needs oil at +$90 to make its budget work, and it thinks its massive oil and natural gas reserves gives it leverage. It’s wrong.

Just yesterday, the European Union killed a natural gas pipeline that would have bypassed Ukraine and brought natural gas right to Europe. Clearly, Vladimir Putin wanted to further isolate Ukraine and weaken the country’s leverage over existing pipelines that run through Ukraine.

I love the fact that Europe chose to support Ukraine and pull a major strategic point away from Putin. And part of the reason Europe can do this is because of liquefied natural gas (LNG) exports from the U.S. They are coming, and soon — and they have the potential to be a major game changer for the global economy and your investments.

You might know of Cheniere Energy (NYSE: LNG), which is building the Sabine Pass LNG export facility in Louisiana. It’s coming online next year.

But you may not know that the utility Dominion Resources (NYSE: D) recently IPO’d its Cove Point LNG facility here in Maryland under the name Dominion Midstream Partners (NYSE: DM). This site looks positioned to take in natural gas from the Marcellus in the Appalachian Mountains.

Dominion Mainstream Partners is making money now, while Cheniere will still be losing money next year. Dominion Resources plans to offer a minimum $0.70 annual dividend, which is about 2.2%. But it will likely be higher than that.

You might also consider an LNG tanker company like Teekay LNG Partners (NYSE: TGP). I’ve had this stock in the Wealth Advisory portfolio for about six months, and it pays a sweet 7.7% dividend.

Both of these stocks will benefit from natural gas trends.

Utility Stocks to Underperform?

Last year, the utility sector for the S&P 500 put in a whopping 23% rally. Utilities have long been a retirement favorite because they are stable and pay nice dividends. But I think the heyday for utilities may be ending.

For starters, they still rely too much on coal, so the potential for a carbon tax could be crushing. Right now, Dominion Resources can generate 23,000 megawatts of electricity. Only 344 megawatts of that is solar. This company is not prepared for a carbon tax.

Germany has instituted policies to push renewable energy like solar and cut carbon emissions. Germany’s two largest utilities have lost around 75% of their value since 2008.

I can’t say for sure that will happen to Dominion and other utilities. But I can tell you that companies like First Solar (NASDAQ: FSLR) and Sun Power (NASDAQ: SPWR) are the ones building solar generation farms for the utilities as they scramble to diversify.

First Solar just completed the 550-megawatt Topaz solar farm in California that will provide power for 160,000 homes for Pacific Gas and Electric. First Solar is also completing a 579-megawatt farm in 2015.

Then There’s Oil

One economist — the esteemed Ed Yardeni — recently estimated that annualized global oil revenues have fallen from $3.8 trillion to $2.3 trillion since June.

That is a lot of loot to lose, and you can see it in the share prices of oil companies. They have been crushed.

No, the oil is age is not over. But with such a massive loss of revenue that perhaps may not be recovered in the future, it’s reasonable to wonder if oil stocks are right for your retirement investments.

After all, investing for or in retirement is not the time to take big risks.

Let the trends be your guide…

Until next time,

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.