TAKING STOCK: A couple steady issues perfect for the long haul

Dear Mr. Berko: We just came into a windfall of $14,000 and asked a broker what we should invest our money in. We told him that we are both 40 and have good jobs but that we want to save and invest for our retirement and that this is very important to us. We hope to retire at 67, which is 27 years from now, but we want to prepare now, and we're very serious about saving and investing. The broker we spoke to recommended that we purchase equal amounts of Clorox and Johnson and Johnson, that we reinvest the dividends every quarter and that we forget about both stocks until we're ready to collect our retirement income. We want to begin in earnest right away because we both doubt that there'll be anything like Social Security around when we retire. Please give us your valued opinion on both of these stocks. NP, Joliet, Ill. Dear NP: I hope the good Lord reserves a special place in Heaven for that broker, and if I'm fortunate enough to be admitted too, I hope he'll be kind enough to have dinner with me one evening a month or at least pizza and beer on Thursdays at Luigi's on the corner of Elm and Main Streets. Most stock brokers would sooner recommend annuities or mutual funds than common stocks for two reasons: 1) The commissions are significantly higher, and 2) Selecting an annuity or mutual fund requires almost zero brain power, while choosing common stocks requires at least a modicum of intelligence. If you reinvest the dividends as this broker recommends, however, those two issues can be good income friends for the rest of your retirement life. I think his emphasis on dividend growth makes enormous sense. I also believe that good dividend growth always trumps principal growth. It reduces your exposure to volatility. And the long-term compounding effect of reinvesting annually increasing dividends will blow away most comparisons to annuities and mutual funds. Wise investors, of which there are very few today, know that after they hang up their tools, it's not the value of their portfolio that counts but instead the amount of spendable income they will have. I strongly approve of Clorox (CLX-$64.00), with a $2.40 dividend that yields 3.8 percent. I approve of CLX because management has increased the dividend for the last 30 consecutive years at an average annual increase of 11.6 percent. So if you calculate the next 27 years at an annual dividend increase of just 8 percent, a 100-share purchase that pays dividends of $240 today will grow its dividend to $1,920 when you guys are 67. That ain't chopped liver. And if you reinvest the dividend every quarter for the next 27 years (that's 108 quarters), your original 100 shares will pay you $3,100 a year. If normal interest rates are 6 percent when you retire, the value of your $6,400 CLX investment should appreciate to $50,000. I like that. I also heartily approve of this broker's choice of Johnson and Johnson (JNJ-$63), whose $2.28 dividend yields 3.5 percent. Like CLX, JNJ has had over 30 years of consecutive dividend increases averaging 11 percent. And while a 100-share purchase would pay you $228 in dividends today, if compounded at 8 percent annually, it would provide you with $18.21 per share, or $1,821 in 27 years. If, however, that money were reinvested for 98 quarters, your dividend income today would grow to $3,000 a year, and your JNJ investment could be worth $50,000. In essence, an investment of $13,000 today could be worth $100,000 (if one can project that far into the future) and pay you $6,100 in dividend income. CLX's products are on the shelves of every grocer, convenience store and supermarket in the country. Its brands - SOS, Burt's Bees, Glad, KC Masterpiece, Kingsford, Pine-Sol, Fresh Step, 409, Tilex, Hidden Valley, Ever Clean, Scoop Away, Lestoil, etc. - are prominent and provide CLX with over $5 billion in revenues and 10 percent net profit margins. It's not an exciting, rah-rah-go-go stock, but its long-term record of revenue, earnings and dividend growth is incredible. Meanwhile, JNJ has more than 30 consecutive years of annual revenue, earnings and dividend growth; superb management; and net profit margins of over 20 percent from a portfolio of consumer products, pharmaceuticals and medical devices and diagnostics that are the envy of the industry. These two issues make a great beginning for a quality long-term growth and income portfolio. Brokers, like your guy, who recommend such issues are scarce as Rhodium - and worth their weight in it, too. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2011 Creators Syndicate Inc. Published: Wed, Dec 21, 2011