3 More Reasons to Buy Dividend Aristocrats Rather Than Annuities

NEW YORK (TheStreet) -- A previous article on TheStreet, "Look to Dividend Aristocrats, not Annuities, to Fund Retirement," detailed why stocks with a history of increasing dividends such as HCP (HCP), Consolidated Edison (ED), and AT&T (T) are superior to annuities, which are contracts with insurance companies to pay a set amount of income over a set period. That article focused on the higher yields of HCP, AT&T, and Consolidated Edison and the lower security of annuities which are not backed the federal government. Here are three more reasons to buy dividend aristocrats, those stocks that have increased the dividend annually for at last 25 years, rather than annuities for retirement and other needs.

When you buy a dividend aristocrat such as ExxonMobil (XOM) or Coca-Cola (KO) you cut out the middleman.

With an annuity, the buyer is paying the insurance company to invest for them. It is far easier and cheaper for an individual to buy Coca-Cola, Exxon Mobil and Wal-Mart (WMT) than to purchase an annuity and have to rely on the investment acumen of the insurance company to be finance it. Such stock investments have built in a professional recommendation, as they are owned by legendary investors like Warren Buffett.

Insurers are becoming more vulnerable to financial runs due to changes in investment holdings.

A recent article in Bloomberg Businessweek reported that the Federal Reserve Bank of Chicago found insurance companies are relying more on selling products that can be cashed in immediately such as annuities and guaranteed investment contracts. The amount of funding for an insurer that is subject to immediate withdraws has increased by 8% since 2007, as a result. That means insurance companies are becoming vulnerable to runs.

Dividend income could be considered to be the most important feature in investing.

Jack Bogle, another investing legend who founded the Vanguard family of mutual funds, reports that the dividend component of an equity has provided almost half of the historic return. Just paying a dividend is a show of strength by a publicly traded company. To be able to increase it annually for 25 years is a powerful testament to how well that company is managed and that the business model is very secure. The average American couple now has a retirement of almost 30 years. As the chart below shows, the dividend amount for these dividend aristocrats will more than double during that period:

Dividend Aristocrat

Dividend Yield

Dividend 5-Year Growth Rate

Years for Dividend to Double based on 5-Year Growth Rate

AT&T

5.31%

2.17%

@30

Coca-Cola

3.06%

7.42%

@9

Consolidated Edison

4.60%

 0.94%  @74

ExxonMobil

2.79%

9.16%

@8

HCP

5.30%

2.92%

@25

WalMart

2.59%

13.44%

@7

Source: Finviz and other financial Web sites

Based on a long history of management commitment, the shareholder knows that the dividend amount will be increased annually for these dividend aristocrats. Depending on the stock, it could more than double for shareholders. From that, the owner of the stock gets a raise simply for being a shareholder, along with many other benefits that do not come with buying annuities.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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