Have a family member who is retiring in a year.  They do not have a lot of investments.  They are going to end up with around 250K in cash all said and done.

They want it to work for them and not touch the principle after taxes.  We were talking and they are thinking of Buying stocks that pay dividends.  They will use the dividend payments as extra cash to live on in retirement.

It would probably end up being 8-10 solid companies who have historically always increased dividends and a few others.

What are the pro's and cons of this?  Are there any index funds out there that do the same thing that anyone knows of?  Looking to make sure they don't make a mistake.  

As an example say:

XOM
BP
JNJ
PG
T
GE
F
DNP
KO
K

I too am interested in advice for index/mutual funds that are dividend payers. I haven't found any but also haven't done a great deal of searching.

OK I found a Vanguard fund.  If I'm doing my math correctly and you invested 250K into this fund:



At the current fund price you would end up with roughly $1729.00 every quarter.  So $6919.00 per year.  

That's not that great..  I need to do the math on those  stocks listed above and see what I come up with.  Rough math puts it almost double that amount from the Vanguard fund.

Sounds like they can't afford to retire unless they are relying on Social Security income.

Most people are not millionaires like you.  Thanks for the helpful contribution.

I think he is just trying to administer a little dose of reality...

The fact of the matter is, if they don't have a pension and they are only trying to live on social security and $6900/yr supplemental they are going to be hurting, especially as the value of the dollar decreases and expenses (medical expenses are a big one) continue to rise into retirement.

I don't think he is trying to be a jerk about it.

Rates are so low it's as if there is a war on savers.  $250k is not going to generate a lot of interest and dividend income, certainly not enough to live on, without taking huge risks.  Please tell me their house is paid for, at least?

Look at  symbol PFF

If that's his goal, then look up "Dividend Aristocrats" and the funds based on them.  These funds are designed to provide a mix of dividends and appreciation.  Many of the stocks you have listed above would be held in these types of funds.  You could probably expect a yield of around 3% but that's really expected in a market that is trading at more than 20x earnings on average.  

If you start finding funds or stocks with yields significantly above that, there is more than likely a price you are paying to get that.  A good rule of thumb with investing is that if something looks too good to be true, then it probably is until you can prove otherwise.  If someone drops you a ticker for a fund that pays a big fat 6%+ yield then you damn sure better understand exactly how it works before you bet the farm on it.  There is almost certainly a catch.  Doesn't mean it's a bad choice, but you better understand the catch.

In my own personal opinion, I think your family member should accept that getting 3% yield while preserving the value of their basis overtime with inflation is a pretty typical outcome these days and make sense with where the market is at right now.  

You could take a look at VIG.  It has a low expense ratio and is mainly comprised of Dividend Achiever companies.  Though not as exclusive as the Dividend Aristocrats that Woodsie spoke of, they're still companies that have increased dividends over the long haul, just not so long of a haul.  The yield is lower (2.18%) but the fund is full of companies known for increasing their dividends.  In the last 10 years the dividend payouts of VIG have increased from about $0.70/share/year then, to $1.80/share/year now.  That's like getting a 9.9% raise every year for that 10 year period.

Putting all their retirement in 8 to 10 stocks even if they are good ones is a lot of risk in my opinion. My experience with dividend stocks is you want something that has paid an increasing dividend for at least 10 years and through a recession. You want stocks that consistently increase their payments by a good percentage above inflation but don't borrow funds or issue shares to pay the dividend. The 3% to 5% yield seems to be a good target. Higher than 6% and they are paying you for high risk. If it was my 250k to live off of, at least 150 would be going into something safe like I-Bonds. Could they take a 50% loss if the market crashes? Most people will say yes but will sell at the bottom anyway. I have a pretty high tolerance for risk I didn't sell after the 2008 crash and doubled down at the bottom, but I would not feel safe with only 8 to 10 stocks for all of my retirement money. If they want a good source of potential stocks that pay consistent dividends this is a good list. Nothing wrong with having at least some money invested in dividend payers.



http://www.dripinvesting.org/tools/tools.asp

VIG would be a good choice.  It's strongly (I mean REALLY strongly) correlated to the Dow Jones Industrial Average.  I'm guessing it's packed with Dow components.

I will be checking this one out for them.

Thanks for the advice so far guys.  

The family member has a small pension + SS.  Paid off home.  They were injured in an accident so even though they wanted to keep working that's not going to happen.

Using those stocks you listed. if you broke up each one into 25k allotments, that would net them $10,780/year , or about 900 a month. Assuming a total tax rate of 15%, that means a total of 760/month. The total yield is about 4.3% Can they retire off their dividends alone? no. But it will supplement social security.

BP - I'd stay away. With oil staying low I could see them cutting the dividend. long term they will be fine, but you family member doesn't have long term.
T - both T and VZ have a lot of debt. Two debt laden giants competing doesn't spell good. I'm not saying stay away, just pay attention to debt levels.

any of those companies are good, verizon is another one thats up around 5%.  

i'd put it in vanguard high yield corporate bond fund, its at about 5.5% yield

Is that available through anyone?  Have the ticker for it?

DNP pays $0.065 per share every month.

So, $250K at $10 a share gets 25K shares. That's about $1625 a month or $19500 a year. Then you pay taxes on those dividends in whatever tax bracket they will fall in.

RCS pays $0.08 per share every month. About $9.23 a share right now.

As always there is some risk, but 250K in a bank earning less than 1% isn't going to amount to much.