July 2006

From the Mickey Mouse Club to the women’s movement, from civil rights marches to stadium concerts, from political rallies to Pilates. For 60 years, baby boomers — the 78 million Americans born between 1946 and 1964 — have been shaping just about every aspect of American life.

And now, as members of America’s largest generation turn 60 at a rate of nearly 8,000 a day, boomers are poised, once again, to cause a shift — this time, in the financial markets.

“As the first of America’s baby boomers approach retirement, they’re concerned about making sure they have the income they need to live comfortably throughout their lifetimes,” says Robin Kollannur, senior portfolio manager for large cap value for Northern Trust.

“As this demographic heavyweight reallocates more assets to income-producing vehicles, we expect to see a growing demand for dividend-paying stocks over the next 20 years.”

A confluence of trends
But there’s more than age prompting this move toward dividend-paying stocks. Three trends are also causing more boomers to search for income:

1) We’re living longer. A 65-year-old man today has a 50 percent chance of living to 85 and a 25 percent chance of living to 92, according to the Society of Actuaries. For women, the projected lifespan is even longer.

That means that if you retire at 65, there’s a good chance that your assets will have to support you for 30 years. This longevity drives boomers toward dividend investing in an attempt to make sure they don’t outlive their assets.

2) We can’t rely on Uncle Sam or Father Company. Boomers won’t enjoy the same level of retirement benefits that previous generations have received from the government or from their employers.

Compared with their parents, for instance, far fewer boomers will enjoy income for life from traditional pension plans.

Plus, most boomers probably won’t receive full Social Security benefits for the rest of their lives. Official estimates suggest that Social Security will begin deficit spending in 2017 — about the time the youngest boomers will be approaching retirement.

That means that boomers — unlike their parents — will be responsible for transforming the assets in their 401(k) plans and other retirement vehicles into income for life. And that points them toward dividend-paying stocks.

3) We can reduce our tax bill with dividend-paying stocks. Recent tax legislation slashed the federal tax rate on qualified stock dividends to 15 percent. That includes dividends for the Northern Large Cap Value Fund, which contains only dividend-paying stocks.

Previously, dividends were taxed as ordinary income up to a maximum rate of 38.6 percent. Bond interest continues to be taxed as ordinary income.

That means that now investors can keep a larger percentage of their return on dividend-paying stocks — just in time to reduce boomers’ tax bills in retirement.

Investing boom
For more than half a century, baby boomers have been influencing advertising, architecture, music, politics, religion and television. From the Beatles to Billy Joel and beyond, whatever the boomers buy has always topped the charts.

“Many factors bode well for dividend-paying stocks, says Robin Kollannur. “Generally, they have been under-valued and under-appreciated by the financial markets during the last few years. With the increasing interest by baby boomers on dividends and the subsequent tax advantages, we expect more companies to offer or increase dividends over the next decade.”