With no help from the Federal Reserve conservative investors are forced to look elsewhere for income – bonds and CDs can’t get the job done.

It seems like an eternity since I last recommended bond purchases for my clients. Actually it was only three years ago, in the middle of the 2008-’09 financial crisis, when short-term investment grade bonds were yielding 6 percent or more. Those days are long gone and the same quality bonds that I bought a few years ago at discounted prices, with the same duration, are now yielding a paltry 1.5 percent! It’s unbelievable how quickly times have changed. Federal Reserve Chairman Ben Bernanke and his posse seem intent on continuing to make investing very challenging for conservative and moderate investors at least until the end of 2014, when they have indicated they would, at least, consider raising interest rates. Until then, if you are an income investor, you either have to assume some risk, or simply accept CD and bond yields that will pay you nothing after inflation and taxes. Actually, you’ll probably be a net loser since the inflation rate alone is probably higher than the rate you will get on your bonds.

For investors who are willing to assume some risk, there are decent options out there – you simply have to be willing to do a little homework and also accept some variation of returns (volatility). But, and here is the good news, you can, to some degree, control the volatility of your portfolio AND earn significantly more income than you can right now from bonds. Take a look at the accompanying table of a sample Low-Volatility Dividend Stock Portfolio. I ran a screen on Value Line (you can do the same for free at the main library on the peninsula) to seek out the least volatile stocks that have also paid consistent dividends over the past ten years. I whittled the list down to 15 dividend stocks that have historically shown much less volatility than the broad market.

The Low-Volatility Dividend Portfolio is simple to construct and understand. In the table, I’ve listed Value Line’s Financial Strength rating for each company, the Current Annual Percentage Yield and the 10-Year Beta. Beta is perhaps the only term that needs some explanation for most readers. It refers to a stock’s volatility relative to the market itself. If the broad market, as measured by the S&P 500, has a beta of 1, then a stock with a beta of less than 1, is less volatile than the market. For example, a stock showing a beta of 0.50, would be half as volatile as the market itself. While beta is a reading of a stock’s past volatility, and certainly is no guarantee of future volatility, it does give you an idea as to how a stock moves relative to the market and how much volatility you might expect. I do think it is important to consider volatility when structuring a portfolio, especially for retirees, since most prefer a portfolio that doesn’t show exaggerated movement.

This sample Low-Volatility Dividend Stock Portfolio has an average beta of 0.37 (about one-third the volatility of the broad market) with an average annual dividend yield of 3.5 percent. In addition, most of the chosen stocks have very high ratings for financial strength – certainly a must for conservative investors. This portfolio should show much less volatility than the stock market itself while also providing the necessary income you need from your portfolio.

In addition, you should consider that while bonds or CDs offer the same (fixed) income payments until maturity, dividend stocks typically offer increased income, every year. The average annual 5-year dividend growth for this sample portfolio is a whopping 8.5%. This means that over the past five years, your annual income has increased at a pace that easily exceeds inflation (unlike bonds), all thanks to rising dividend payments. Furthermore, there is obviously the possibility of price appreciation (or depreciation) too, but the objective here is to provide you with some much needed income with volatility that you can tolerate.

If you are an investor who needs extra income to maintain your present lifestyle, you’ll need to accept some risk – you simply can’t get enough from bonds or CDs and it doesn’t look like that will change for several years or more. So, consider creating a low-volatility portfolio of dividend stocks to meet your income needs and at least have a chance to outpace inflation and taxes over the coming years.

Low-Volatility Dividend Stock Portfolio