Adding Pizazz.

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Author: Mannes, George gmannes@moneymail.comSivy, Michael sivy@moneymail.com

$5K

Adding Pizazz

Now that you're a seasoned saver, you have a rich menu of investment options to consider. Crucially, that next $5,000 can make your portfolio safer in your pre-retirement years

You've created a diversified portfolio and built up your retirement accounts. Now, with a fresh $5,000, you have the flexibility to do all sorts of fine-tuning. Ask yourself these questions:

Are you over 50? As you get within a decade of retirement and your priorities shift from building your wealth to making it last, income investments become more important. They lower your risk and can be a steady source of cash later. Bonds are the obvious way to add income. But you can get about as much income today, especially after taxes, by buying high-dividend stocks. See "Income, No Bonds" at right.
Are you in the 25% tax bracket or higher? Bonds boost your income and lower your risk, but you have to pay a full load of taxes on them. You may do better in municipals. See "Income, No Taxes" at right.
Are you willing to devote more time to your investments? Lots of investors reach their goals using funds alone, but buying individual blue-chip stocks can cost you less in fees and taxes. Just make sure you have the time and inclination to research and track them, as well as the fortitude to ride out short-term losses. For the names of eight stocks that look especially timely now, see "Build Wealth" below.
Do you worry about oil prices, inflation or recession? With less time before you tap your savings, it's tougher to recover from a big loss. A diversified portfolio should protect you against a sudden shock. But adding certain stocks or funds can fortify you even more against specific threats. See "Disaster Defense" at right.
Do you plan to leave money to your kids? As long as you don't need another $5,000, consider giving money to the kids now so you can have the pleasure of watching it be put to work. Or play. See "Out of the Box" at right.

Income, No Taxes

BEST $5K CHOICE: T. Rowe Price Tax-Free Income (PRTAX)

T. Rowe Price Tax-Free Income (800-638-5660), which invests in high-quality municipal bonds, now yields 4.4%. That works out to 5.9% if you're in the 25% tax bracket.

5.9% tax-equivalent yield

Income, No Bonds

BEST $5K CHOICE: iShares Dow Jones Select Dividend Index (DVY)

This ETF is a low-cost way to own a wide variety of high-yield stocks, financial services and utilities in particular. The recent yield is 3.1%. Big plus: Dividends are taxed at a lower rate (15%) than bond income, and stocks' growth potential is better than with bonds.

Build Wealth

BEST $5K CHOICE: Blue-chip growth stocks

Adding stocks to your portfolio can help you place targeted bets. If you think military spending can only go up, for instance, you can emphasize the sector by buying General Dynamics. These eight stocks represent a variety of industries and all look especially timely. They're ranked by dividend yield; the higher the yield, the safer the stock is likely to be.

MORE PICKS For additional shares that have a total return potential of more than 11% a year, based on their dividends and projected earnings growth, look at the Sivy 70 list of blue-chip growth stocks.

COMPANY NAME (TICKER): J.P. Morgan Chase (JPM)
PRICE: $42.10
P/E RATIO: 12.4
YIELD: 3.2%
WHY IT LOOKS GOOD: Outlook for banks should improve; CEO is focused on
                   raising profitability


COMPANY NAME (TICKER): General Electric (GE)
PRICE: $33.95
P/E RATIO: 17.1
YIELD: 2.9
WHY IT LOOKS GOOD: Top-quality industrial conglomerate offering
                   unusually high dividend yield


COMPANY NAME (TICKER): Abbott Laboratories (ABT)
PRICE: $43.87
P/E RATIO: 17.3
YIELD: 2.7
WHY IT LOOKS GOOD: Some hot new drugs and a promising new line of
                   cardiovascular products


COMPANY NAME (TICKER): General Dynamics (GD)
PRICE: $65.64
P/E RATIO: 16.4
YIELD: 1.4
WHY IT LOOKS GOOD: Leading tank maker and a direct beneficiary of
                   growing defense spending


COMPANY NAME (TICKER): Home Depot (HD)
PRICE: $43.12
P/E RATIO: 14.0
YIELD: 1.4
WHY IT LOOKS GOOD: Do-it-yourself retailer now undervalued because
                   housing market may slow


COMPANY NAME (TICKER): Anadarko Petroleum (APC)
PRICE: $100.55
P/E RATIO: 8.6
YIELD: 0.7
WHY IT LOOKS GOOD: Independent oil and gas producer with 85% of its
                   reserves in North America


COMPANY NAME (TICKER): CVS (CVS)
PRICE: $29.05
P/E RATIO: 18.5
YIELD: 0.5
WHY IT LOOKS GOOD: Rapidly growing drugstore chain that is gaining on
                   larger rival Walgreen


COMPANY NAME (TICKER): Aetna (AET)
PRICE: $50.33
P/E RATIO: 18.3
YIELD: 0.0
WHY IT LOOKS GOOD: A health insurer on the rebound and likely to profit
                   from new types of plans

NOTES: As of March 24. P/E ratios are based on estimated earnings for the current year.

SOURCE: Thomson/Baseline.

OUT OF THE BOX

Give It Away

You can pass on $11,000 a year to anyone ($22,000 if you're married) without incurring a gift tax. If you give your children money now, you get to see them enjoy it.

Disaster Defense

If you've been reading about economic threats and worry that you're unprepared, you can add extra protection for three specific risks.

Inflation

BEST $5K CHOICE: T. Rowe Price New Era (PRNEX)

Consumer prices have risen 3.6% over the past year, and many analysts think they are headed a lot higher. Even 4% inflation makes it harder to save enough for retirement. You can offset that risk by buying New Era (800-638-5660), which owns natural resources and energy stocks.

Oil Shocks

BEST $5K CHOICE: Anadarko Petroleum (APC)

Demand for oil is soaring in China and India. That alone could mean much higher energy prices, which could depress the economy. You can hedge by buying Anadarko. One advantage is that 85% of its reserves are in North America, which means that, unlike companies with wells in the Middle East, it can't be hurt badly by foreign unrest.

Recession

BEST $5K CHOICE: Vanguard Long-Term Treasury Investor (VUSTX)

The first thing new Federal Reserve chairman Ben Bernanke did was hike rates to forestall inflation. Trouble is, if he raises interest rates too much, he could tip the economy into recession. If you worry you can't ride out such slumps, put part of your money in a long-term bond fund like Vanguard Long-Term Treasury Investor (800-851-4999). Its value will rise when rates fall during a slowdown.

TOUGH CALL

Buy a Vacation Home or Stocks?

Second-home prices have been on the leading edge of the real estate boom. Should you buy in now?

WHY REAL ESTATE

• It's easy to get your kids to visit if your house is on the beach.

• You can deduct mortgage interest and property taxes, just as with your first home.

• There's an indescribable satisfaction to owning, not just visiting.

WHY STOCKS

• If you pay cash for the home, you'll be left with a smaller pool to live off of. Borrowing adds to your expenses.

• Though beachfront prices have zoomed, you can't bank on more of the same. You're kidding yourself if you think this is just another retirement investment. "There could be 10 years of no appreciation," says financial planner Richard Schultz.

• It's easier to draw income from stocks.

BOTTOM LINE

If you have to ask yourself whether you can afford the house, don't buy it. If you can measure the time that you will spend there every year in weeks, not months, stick to stocks and make your getaway a rental, not a purchase.

PHOTO (COLOR)

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By George Mannes, gmannes@moneymail.com and Michael Sivy, sivy@moneymail.com

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