Many Australians aged 60 or over have a self-managed superannuation fund in pension phase. This means that they must withdraw a minimum amount each year, but will not have to pay tax on the fund's earnings.
With this in mind, it makes sense for self-funded retirees to have a couple of stocks that pay a reliable dividend. While capital gains are important, a solid dividend can provide the cash necessary to pay the minimum amount each year.
One company I think is a best buy at the moment is Thorn Group (ASX: TGA). Thorn recently suffered a drop in share price, in response to a lower than expected profit result. The company currently trades on a trailing yield of 4.5%, but I think there is a strong chance the dividend will grow over the coming years. Shares are only slightly up since I covered the company in this article.
Thorn Group has a variety of businesses, but the most important is Radio Rentals. The core competency of the company is not retail, however, but the management of debtors. One recent initiative is a Rent-Drive-Buy program for cars. Personally, I think that the company is likely to grow this business successfully, and will continue to improve its debt collection operations. Thorn Group gives investors a reasonably safe way to receive a reliable dividend, and because Thorn is expanding, there is a reasonable chance of capital gains to boot.
Another worthy addition to the pension phase portfolio would be Spark Infrastructure (ASX: SKI). Spark owns power network infrastructure and pays a dividend of about 6.6% unfranked at current prices. Spark borrows money to build poles and wires (and other parts of the power network) in Victoria and South Australia. It then charges users to recoup its costs, and make a profit (which is regulated). Because profits are regulated, investors can worry less about the debt than with an ordinary company.
One risk on the horizon for Spark Infrastructure is the looming end of the current regulatory period in 2015. The previous Labor government was indicating that it was unhappy with the fact that network companies were driving up power bills. However, the current government is disingenuously blaming the carbon tax for just about, and seems unlikely to clamp down on large profits earned by infrastructure companies such as Spark. To an extent, buying shares in Spark Infrastructure allows investors feel a bit better about their ever-increasing power bill.
A great way for the elderly to capitalise on their natural advantages is to buy shares in Cochlear (ASX: COH). Cochlear makes hearing aids, and is about to bring out a new model. If you are over 60, you are likely to meet many people who use Cochlear's products (and may even have a hearing aid personally). This puts seasoned investors in an ideal situation to judge whether the company is retaining its competitive edge. Cochlear yields 4.4%, partially franked.
One risk with Cochlear is that it might cut its dividend; it is not sustainable at current levels unless earnings increase. A product recall in 2011 and fears that competitors have a superior product have turned market sentiment against the company. However, hearing loss comes with age and the populations of developed nations are ageing, so I think earnings growth is likely.
The fact that the company has prioritised maintaining the dividend shows that investors can probably rely on a solid dividend stream; a real bonus for self-funded retirees. Furthermore, the company earns impressive returns on equity and can probably withstand increased competition, although much will depend on the success of the new Cochlear hearing aid. I can't wait to quiz someone who has one!
Foolish takeaway
The famous investor Peter Lynch popularised the idea of investing in what you know and many investors conduct their own informal surveys of their company's customers. Self-funded retirees are in a strong position to judge the popularity of Cochlear's implants, and observe the quantum of their power bills. Anyone can walk into a Radio Rentals shop and talk to staff there.
Part of the joy of investing is monitoring the progress of your company, and I think these stocks deserve the consideration of investors with a SMSF in pension phase.
