CONSERVATIVE investing - investing for retirement

Kiplinger's Personal Finance Magazine,  June, 1999  by Ian Baldwin,  Sean O'Neill

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Dick Dunseath doesn't shy away from risk: He left a 20-year career in banking to start a custom-sign business from scratch in Phoenix. "I treat life as an adventure," he says. But Dunseath, 52, and his wife, Diane, 48, don't view their investments as an adventure. This is money they'll need in retirement. They'd also like to pass along some of it to their three kids.

Dunseath's strategy is to achieve return from both dividend income and capital appreciation--total-return investing is the name for it. Plenty of stocks give you the best of both worlds--a growing stream of dividend income and a rising share price. The growth of the business feeds the share price, while the dividends act as a sort of anchor for the stocks in turbulent markets. In fact, the stocks below, taken together, are 47% less volatile than the S&P 500. You can reinvest the dividends in more shares, as Dunseath does, or spend the income.

Dunseath looks for "one decision" stocks that he can buy and hold even after he retires. "I don't want to have to sell them to finance my retirement," he says, "so I look for companies with a history of rising earnings and dividends. By the time I retire in ten or 15 years, the dividends will have grown to the point where I'll get the same income on those securities that I would have gotten from selling something."

The portfolio has a healthy dose of stocks of utilities and real estate investment trusts (two perennially high-yielding industries) and a smattering of stocks from other industries. Stocks were chosen with an eye for yield--all offer yields higher than the S&P 500's average of 1.3%--but, more important, with an eye for earnings growth and a steady dividend history. If equal amounts are invested in each stock, the dividend yield for the portfolio is 4%.

THE STOCKS

BANK OF AMERICA

(BAC, NYSE, $73). The cream of the banking crop offers good yield and good growth potential. As the nation's largest bank (in terms of bank assets), Bank of America does business with one-third of alL U.S. households and handles more than 8% of the nation's deposits--more than any other bank. The company has renewed its focus on lower-risk regional banking, which accounts for about 70% of the company's $6.5 billion in profits for 1998. Analysts expect earnings growth of 29% in 1999. The stock sports a healthy yield of 2.5%, courtesy of a $1.80-per-share dividend.

BELL ATLANTIC

(BEL, NYSE, $58). Although it narrowly missed out on buying AirTouch (which was snapped up by Vodafone, in the aggressive portfolio on page 65), Bell Atlantic's future looks bright, according to Argus research director John Eade. The company recently posted its fourth straight year of double-digit earnings gains, and its impending acquisition of GTE could make it a global rather than a regional telecom company, says Eade. The stock trades at only 17 times forecasted 1999 earnings and dishes out an annual dividend of $1.54 per share, yielding 2.6%.

BP AMOCO

(BPA, NYSE, $109). As oil prices rebound, so too do companies like BP Amoco. Formed in 1998 when British Petroleum merged with Amoco, the resulting company is one of the world's largest diversified oil producers, with profits of $4 billion in 1998, and will grow even larger if its recent acquisition of Atlantic Richfield is approved. BP Amoco's management, says J.P. Morgan analyst Nick Davies, has "consistently beaten ambitious targets and delivered value to shareholders." Analysts expect earnings to grow 11% in 1999, and boom 43% in 2000. The stock yields 2.6%.

DUKE ENERGY

(DUK, NYSE, $54). Duke supplies power to two million customers in the Carolinas, and its pipelines carry 12% of the natural gas used in the U.S. Management is positioning the company for a deregulated future, producing "one of the strongest utilities in terms of financial quality, low-cost production and excellent growth," says Paine-Webber analyst Barry Abramson. The stock yields 4.1%.

FANNIE MAE

(FNM, NYSE, $66). Fannie Mae is the nation's largest packager of residential mortgages for investors. The company stands to benefit from widening spreads on mortgages that it purchases and holds, says CIBC Oppenheimer analyst Steven Eisman, who views Fannie Mae as "a safe-haven stock." With the economy on stable ground, analysts' expectations of 13% annual earnings growth over the next three to five years look reasonable. It yields 1.6%.

FEDERAL SIGNAL

(FSS, NYSE, $23). Coming off a lackluster 1998, Federal Signal, the nation's top manufacturer of fire engines and ambulances, should make a "sharp recovery in 1999," says Legg Mason analyst Laurence Baker, thanks to the resolution of production problems and improved efficiency. Earnings for the fourth quarter of 1998 jumped 24% from the previous year, and the yearend backlog of orders grew to a record $360 million. Resurgent sales should help garner $45 million in free cash in 1999, which could help the company finance acquisitions, notes Baker. Analysts expect annual earnings growth of 15% over the next three to five years. The yield is 3.2%.