It may sound impressive, but a $100,000 salary isn't all it's cracked up to be. What would have cost you $100,000 in 1976 would cost you a whopping $380,000 today.
And that's just adjusting for inflation…
In fact, to get the same benefit from a "six-figure salary" that you would've earned in yesteryear, you'd need to make about $250,000 today.
Welcome to the magic world of 2012. It's a place where taxes go up, prices soar and the middle class gets pushed closer and closer to the brink.
The same thing is true for retirees.
Thanks to the Federal Reserve's zero interest rate policy, a $2 million nest egg isn't what it used to be, either.
For instance, did you know that Moody's recently changed its pension fund return assumptions to 5.5% because of today's low interest rates?
At those levels, a $2 million nest egg would "only" throw off a $110K income stream, which is pretty marginal, especially when you allow for inflation and spiraling medical costs.
What's more, it's not obvious to me how exactly you can guarantee that 5.5%.
As for the 8% returns you were promised all of your adult life on your pension funds, those are long gone, too. In the low-growth economy facing us now, those types of returns are going to be impossible for big funds to achieve.
Take CalPERS, for instance. It's the California Public Employees' Retirement System pension fund-the biggest public fund in the U.S.
CalPERS only recorded a 1% return this year, a long way indeed from the 7.5% return their actuaries were assuming.
But don't worry, there's a way investors can earn better returns and create income streams that can help to put them comfortably above that benchmark six-figure salary-even during periods of low growth.
One of these investments actually yields 8.6% and is heavily undervalued at the moment. More on that later.
Boosting Your Returns in a Low-Growth Economy
First, here's something every income investor needs to realize: to get the returns you need to live comfortably, avoid bonds altogether.
With 30-year Treasury bonds at a 2.7% yield, you won't even be able to keep pace with inflation. Put any of those babies in your portfolio and you'll be condemned to eating cat food in your old age once inflation reduces the value of the income, and the principal takes a beating as interest rates rise.
Mortgage bonds are not much better. If interest rates go up, 30-year fixed-rate mortgages will be a GREAT deal for the homeowner, but a lousy deal for the investor.
Even corporate bonds are not a good deal. To get the 6% plus yield you need to make up for the ravages of inflation, you have to buy bonds of companies I wouldn't care to have dinner with.
To get a return you can actually live on, you need a mixture of two techniques.
One is to buy blue chip stocks. But you need to buy a particular type of blue chip, which I call "heirloom" companies.
As I discussed last week, there are 89 companies that have increased their dividends every year for the past 30 years or more. These make excellent long-term investments.
After all, when a company increases their dividend every year you can be pretty sure that both the dividends they pay and their value will keep up with inflation over the long run.
But not all of them are the same. Some of these companies have rather uninteresting dividend yields. For example, Coca-Cola (NYSE: KO), which has increased its dividend every year for 49 years, today yields only 2.6% and is trading at 21 times earnings.
Coke's 2.6% yield is less than you could get on 30-year Treasuries (though Coke is still a better deal than Treasuries, because Coke's dividends should increase with inflation.) But the chance of a rating downgrade, to say 15 times earnings, is too great, and there are better values available.
The good news is that 23 of the 89 heirloom companies not only have increased their dividends every year since at least 1982, but have dividend yields of 3.5 % or more and P/E ratios comparable with the current 15 times on the Standard and Poor's 500 index.
Emerson Electric (NYSE:EMR), for example, has increased its dividend every year since "Peggy Sue" topped the charts (1957, for those of you too young to remember!) and has a dividend yield of 3.6%. It's also on only its third CEO since 1954, which I regard as an additional bull point!
Alpha Bulldogs: The Push For Higher Yields
These heirloom companies should represent about two-thirds of your portfolio. With them your income and principal will increase with inflation while keeping your safety level very high.
However, for the remaining third of your portfolio you will need to really focus on boosting your yield. In my Permanent Wealth Investor service, I recommend what I call "Alpha Bulldog" stocks to my readers.
While these Alpha Bulldog stocks do not have quite the permanence of heirloom stocks, they do pay very high dividends-some as high 7-10%. However, the good news is that their dividends are solid and they are reasonably recession-proof.
As a final tidbit, there is one– and only one–company that falls into both categories. It has increased its dividend every year for 30 years and now boasts a yield of 8.5%.
It is Old Republic International Corp. (NYSE: ORI).
Of course, ORI has had a rough time in recent years because of losses on its mortgage-insurance business, but those losses are now decreasing and it is no longer writing any more of those policies.
Meanwhile, the rest of its business is both solid and nicely profitable, which means its dividend yield of 8.5% is solidly assured for the future.
What's more, as an additional bonus, the company's shares are currently trading at just 56% of net asset value, so there should be some capital gains ahead as the mortgage insurance business runs off.
So yes, the world has changed radically since the days when everyone dreamed of making it big with a six-figure salary.
Unfortunately, these days that's just a start.
Martin Hutchinson, Editor
Permanent Wealth Investor
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