The Motley Fool: Reality Income for dividends

The Fool’s Take

Realty Income is one of the largest real estate investment trusts, or REITs. It owns about 15,600 properties in the U.S. and Europe, most of which are occupied by retail tenants that operate recession-resistant (but not recession-proof) businesses. Top tenants include Dollar General, Walgreens, Wynn Resorts, FedEx, BJ’s Wholesale Club, Tractor Supply, Home Depot and Walmart.

Convenience stores, grocery stores and drugstores are among the top tenant types. Tenants sign long-term leases that require them to pay taxes, insurance and most maintenance expenses for the properties. Over the past 15 years, Realty Income’s stock has generated an average annual return of about 7.4%. It has also raised its dividend for 110 consecutive quarters, illustrating the power of its steady and predictably growing rental income stream.

Realty Income’s dividend yield was recently a hefty 5.5% — and it pays out its dividends monthly, unlike most companies, which pay quarterly. Realty Income was recently down by about 10% from its 52-week high and about 27% from its all-time high. However, this isn’t because of anything wrong with the business itself — this steady compounder is very sensitive to interest rates. That means it could also benefit if rates fall over the next few years.

Now could be a great time for long-term investors to buy. (The Motley Fool owns shares of and recommends Realty Income.)

Ask The Fool

From F.E., Greensburg, Pa.: What’s capitalism, exactly?

It’s an economic system in which individuals and private organizations own businesses that are operated for profit, with prices set by supply and demand (that is, what people are willing to pay).

The thinking is that these businesses will compete with each other, often leading to better prices for consumers. Capitalism is sometimes referred to as a free-market economy or free enterprise.

It’s a system where there are incentives for innovation and efficiency, and where some people and businesses can amass a lot of wealth. Income inequality is common, though, and there can be boom and bust cycles.

From C.W., Baton Rouge, La.: What are money market accounts and money market funds?

A money market account is a bank account that’s typically insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. Such accounts have features of both savings and checking accounts, often permitting a few checks per billing period while paying more in interest than a standard savings account.

Before opening a money market account, verify the insurance and the amount protected (it’s often $250,000).

A money market fund is a mutual fund that invests primarily in short-term U.S. Treasury securities, municipal bonds or corporate bonds and bank debt securities. Such funds are considered safe places to park money, but they generally offer lower returns than more risky investments.

Unlike money market accounts, they’re not FDIC- or NCUA-insured. You’re not likely to get rich — or poor — with money market accounts or funds. But they’re a great place to park your short-term money, and some money market funds were recently yielding more than 4%.

The Fool’s School

If you approach and enter retirement without a good withdrawal strategy, you might drain your nest egg too quickly and run out of money too soon. Or you might take money out too cautiously, enjoying retirement less.

There’s no single best withdrawal strategy for everyone. For many years, a common guideline was the “4% rule.” It suggested taking out 4% of your nest egg in your first year of retirement and then adjusting each subsequent year’s withdrawal for inflation. So with a $500,000 nest egg, you’d take out $20,000 in Year 1 and if inflation was 3% that year, you’d take out $20,600 in Year 2. And so on.

But the 4% rule is imperfect. For starters, much depends on when you start retirement. For example, if you retire right before a big market crash, your 4% withdrawal will end up being a bigger chunk of your newly 4% shrunken portfolio. And the 4% rule and other withdrawal guidelines are arrived at by looking at past returns. In the next 30 or 50 years, stocks and/or bonds may perform differently than they did in the past.

The 4% rule (and some others) also aim to make a nest egg last for 30 years. But what if you’re retiring at 58 and your family tends to live into their 90s? Your retirement might last 40 years. Or, if you’re in poor health and retiring at 70, you might not need your money to last 30 years. What should you do?

Well, read up on safe withdrawal rates, and don’t be afraid to consult a financial adviser. You can find fee-only advisers near you at NAPFA.org and GarrettPlanningNetwork.com. Meanwhile, prepare to be flexible in making withdrawals throughout your retirement.

You might look to various studies for guidance, but don’t rigidly follow one rule. For example, when the economy is booming, you might withdraw more; when it’s down or struggling, you’d withdraw less. This approach is especially important in the early years of your retirement, when you might spend more on hobbies and travel.

My Smartest Investment

From M.C., online: My smartest investment came after divorcing my husband at age 40. I decided that as a single woman in charge of my finances, I’d better start saving for my retirement big-time! I contributed heavily to 401(k) accounts, always getting a percentage as an employer match, and sometimes I got profit-sharing money, too.

When I started working for an investment company 11 years before I retired, I rolled everything into a single IRA. Most importantly, I never took a distribution until 10 years after retiring. Good investment advice and working part-time in retirement have enabled that money to continue to grow.

The Fool responds: Congratulations! Divorce or no divorce, anyone whose workplace offers a 401(k) or other tax-advantaged retirement account would be wise to participate. It’s especially heartening that you’ve done so well as a single woman, because women tend to be worse-prepared for retirement; they have generally earned less than men and have often been out of the workforce for a few or many years, caring for family.

You were smart to save enough in your 401(k)s to collect available “matching” dollars as that’s free money. Working a little in retirement is a good idea, too, as it can provide extra income and can give your saved dollars more time to grow for you.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)

Who Am I?

I trace my roots to 1898, when 20 paper mills joined forces. I bought the Hammermill Paper Company in 1986, the Federal Paper Board Company in 1995 and Champion International in 2000.

Today, based in Memphis, Tenn., and with a recent market value near $25 billion, I’m a global sustainable packaging giant. I employ more than 65,000 people, operate in more than 30 countries and rake in more than $18 billion annually.

I was once the largest private landowner in America, with more than 8 million acres of forestland and some 19 million acres worldwide.

Who am I?

Forget last week’s question? Find it here.

Last week’s answer: 7-Eleven.