Stocks, bond funds can pay for coverage

By Deborah Adamson
Advertiser Staff Writer

Mike Friedel has been taking care of his wife since a car accident four years ago triggered her health problems. But he is concerned that if his 46-year-old wife doesn't get better, she will need long-term care and he has to find ways to pay for it.

"It's kind of frightening," said Friedel, 59.

For baby boomers who want to afford long-term care insurance, there are ways to raise money by shifting your investments, said Alan Kodama, a financial planner at American Express Financial Advisors.

For example, if the policy costs $300 a month, you need to raise $3,600 a year.

If you have $80,000 in investments, find ways to make the assets pay out at least a 5 percent return for a total of $4,000 yearly. You don't have to spend the principal to pay for coverage and your lifestyle won't suffer.

Shift your assets into stock funds that pay dividends or bond funds that pay enough interest, or get a combined stock and bond fund. If you're in these types of funds, make sure you have a good balance of return and expenses.

With the just-enacted cuts in dividend taxes, your dividends now would be taxed at 5 percent to 15 percent depending on your income bracket, down from your personal income tax rate, which typically is higher.

Capital gains taxes also fell to 5 percent to 15 percent, said Sue Stevens, director of financial planning at Morningstar. The old capital gains tax rate was 10 percent to 20 percent, depending on income.

A typical dividend-paying stock fund yields 2 percent on average, Stevens said. So an investment of $125,000 would generate $2,500 a year.

Two dividend funds she recommends are American Century Equity Income (TWEIX) and Fidelity Dividend Growth (FDGFX).

American Century carries a 2.42 percent dividend yield. In the past five years, the fund has had a total return of nearly 8 percent annually on average. In the same period, the Standard & Poor's 500 Index fell by 1.4 percent a year, according to Morningstar.

Investors can make money on a dividend-yielding stock two ways: the dividend payout itself and any gains in the stock price. The total return incorporates both.

Fidelity Dividend Growth has a dividend yield of 1 percent. But its total return over the past 10 years is 14 percent annually on average, beating the S&P 500 by 4.5 percent.

One caveat: make sure this is money you don't need for daily living, Kodama said. If so, you'll be dipping into the principal and your payout would decline. You might not be able to maintain payments for your long-term care insurance.