Reader Asks About Blue Chip Stocks

Periodically, I answer questions directly from our readers. Here’s what’s on their minds:
Question: “I am interested in investing about $100,000 in blue chip stocks. What are three stocks you’d recommend that pay good yearly dividends?” J.W. 
Answer: First let me make a point that you’ll want to own a minimum of ten to twenty stocks in order to reduce what’s called ‘single-company risk’… the risk that the failure of one company that you own devastating your entire portfolio. A lot of people in Birmingham learned this lesson in 2008 when they refused to diversify a concentration in bank stock and saw their wealth and income devastated as bank stocks plummeted 70% or more and slashed dividends. Three blue chip stocks that we currently own for clients are Southern Company yielding 4.2%; ATT yielding 5.8%; and Kimberly Clark yielding 3.8%. 
Another reader asked a similar question but wanted a recommendation for an Exchange Traded Fund (ETF). ETFs are baskets of stocks rolled into an investment product similar to an index mutual fund. You can buy and sell them like stocks. For example, iShares Dow Jones Select Dividend Index Fund (symbol DVY) is currently yielding about 3.5% and last year’s return was over 11%.
Question: “My husband and I are both age 71 and therefore must take Required Minimum Distributions from our IRA accounts. He chooses to continue working so between his paycheck and our Social Security we do not need two IRA distributions. What would you recommend we do with the money?”  
Answer: You have a number of choices. Most people will simply open a personal investment account at a discount broker such as Charles Schwab or Vanguard and invest in no load mutual funds. Be sure you allocate a portion to bonds as well as stocks. An example of a mutual fund that does this for you is Vanguard Wellington (VWELX) which allocates about 34% to bonds and the balance to stocks and is yielding about 2.7%. An alternative would be to use your IRA distributions to pay down debt, if you have any or you could put it in CDs at your bank.
Question: “I am receiving a retirement from the Teacher’s Retirement System of Alabama. What percentage would you suggest I invest in stocks versus bonds for 2012?” M.D.
Answer: Generally, I’ll start this conversation with a 60% allocation to stocks; 40% to bonds then make adjustments based on the particular client facts. With this allocation, I feel you’ll receive 70% or more of the stock market return over a full market cycle (5-10 years) while experiencing about half the volatility. If you’re feeling more venturesome, you might increase your stock allocation to 70%. Except for the most worried and conservative investors, I’d have at least 30% in stocks. 
And from the same reader, “Do you recommend a 529 college savings plan for my grandchild?
Yes! The gift of a good education is one of the greatest gifts you can give a family member. Alabama has a great plan and you can check it out at  Be sure to use the Vanguard funds as your investment choice.
Question: “I am thinking of giving stocks to my grandson instead of presents for his birthday. He is going to be thirteen and rather than giving him something that is a throwaway gift, this could be a learning experience. Could you give some pointers particularly how it would relate to his parents tax situation? S.C.
Answer: It would take a pretty mature thirteen-year-old to get excited about receiving stocks instead of the latest game for his Xbox player so you might brace yourself for the lack of hugs and kisses. Consider choosing a stock of a company he can relate to such as Disney or Microsoft (the maker of Xbox) and you might want to receive the actual stock certificate and have it framed as a visual reminder that he ‘owns’ the company. Either you or his parents will need to be the ‘owner as custodian’ for your grandson since minors cannot own property. Any dividends paid will be reportable on his income tax return which may mean one will need to be filed for him for the first time. Most likely, no taxes will be due unless he has other income. Any unearned income in excess of $1,900 must be reported on the parents tax return with taxes paid at their tax bracket.