Investing in dividend stocks for retirement is a strategy that’s particularly useful if you’re reliant on your portfolio yield for regular income.
Since pensions have become practically non-existent (the Bureau of Labor Statistics says that only 15% of private-sector workers have pensions these days), retirees need to look beyond just Social Security for their retirement income needs.
One benefit of using dividend-paying stocks and ETFs in retirement (in lieu of selling portfolio holdings to raise cash) is that it can help you continue growing the value of your retirement assets. Although dividend stocks tend to move less than high-growth investments, they do appreciate over time.
A healthy dividend can provide you with the income you need while still allowing your portfolio room to grow.
On top of that, dividend-paying stocks tend to hold up better during corrections or market downturns because their value isn’t tied entirely to the prospects of further gains.
What You Need to Know about Dividend Investing for Retirement
When a company pays a dividend—and especially if it makes an effort to increase that dividend every year—it shows that it cares about rewarding shareholders. On Wall Street, these companies are often referred to as “shareholder-friendly,” and that stance demonstrates alignment between management and investors.
Plus, companies that have the cash flow to pay regular dividends typically make safer, more reliable investments. The best dividend-paying stocks are high-quality, long-lived companies with predictable business models—they tend to hold up better in the face of a lousy quarter or an adverse news event.
Investing in dividend stocks isn’t going to make you rich overnight. But they can significantly build up your nest egg if you buy and hold them for years, or even decades.
When you’re considering dividend investing for retirement, the appropriate strategy will depend on a number of factors, such as how much you need to generate to cover your expenses (the “4% rule” is a popular rule of thumb that posits you should only withdraw 4% of your total retirement assets in a given year), your overall risk tolerance, and the number of years you expect to be drawing down your retirement portfolio.
If you’re newly retired, you may want to favor equity investments over fixed income because you may need additional growth potential if you’ve got 20-plus years of retirement ahead of you.
You can also participate in dividend reinvestment plans (DRIPs) if you don’t need the income from your dividends. When you choose to reinvest your dividends, each stock’s dividend payment is used to buy new shares of that same stock, at the market rate. You then start earning dividends on those new shares, and those dividends get turned into more shares, and so on. Over time, the number of shares you own and the size of the dividend checks you receive every quarter will both gradually increase, without you doing a thing.
This is particularly useful if your retirement assets are going to be passed down to heirs rather than covering your income needs.
Of course, there are lots of ways to invest for retirement, and dividend investing is just one of them. If you want to be fully prepared, we would like to invite you to look into the Cabot Retirement Club, where you can stay connected to everything about dividend and income investing to ensure your happy retirement. To learn more, click here.
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*This post is periodically updated to reflect market conditions.