We all want to retire some day. Being able to afford it is the hard part.
According to a CBS MoneyWatch report, one in three Americans will run out of money in retirement. To avoid that trap, we need to build up a considerable nest egg. A good way to do that is by investing in retirement stocks.
The term “retirement stocks” is a bit broad. Unlike small-cap stocks or value stocks, there’s no one-size-fits-all definition for what qualifies as a retirement stock. Basically, it’s any stock that you buy and hold with the intention of selling it—hopefully at a profit—after you retire.
What makes for a good retirement stock? Stocks that pay a dividend are the best place to start. With the Federal Reserve keeping short-term interest rates near zero for the better part of a decade, the bond market has essentially dried up. Dividend stocks are your best—and safest—source for earning income through investing.
Dividend growers make for even better retirement stocks. That is, dividend-paying common stocks that have a long history of increasing their dividends annually. There are hundreds of companies that do just that, and a few dozen that have increased their dividends for at least 25 years straight—popularly known as “Dividend Aristocrats.”
Buying and holding investments that are going to pay you a little more each year is a smart way to outpace inflation, which can eat away at your nest egg. But you don’t want those dividend increases to be too small. A company may have increased its dividend 1% each of the last 40 years, but 1% increases aren’t going to keep up with inflation.
What you want are companies that regularly increase their dividends by a substantial amount, at least more than the rate of inflation. And you don’t have to limit yourself to the Aristocrats to find reliable dividend growth.
Dividend growers aren’t the only equities that make for good retirement stocks. But they’re the safest option for building a steady income stream.
Growth stocks can also be viable retirement stocks. So can value stocks, small-cap stocks—even emerging market stocks.
Apple didn’t pay a dividend until recently. Google and Amazon.com still don’t pay dividends. But if you had bought shares of those companies 10 years ago, you’d be sitting on a pretty hefty return right now—the type of return that can quickly add to your retirement next egg.
Ideally, what you’ll hold in your retirement portfolio is a range of investments. Dividend growers are the most reliable buy-and-hold retirement stocks, and should probably occupy the largest portion of your long-term portfolio. But it makes sense to have some growth and value positions in there too. By buffering your retirement portfolio with some safer positions, you can afford to take a few risks. You never know which of them could turn into the next Apple or the next Google.
To learn more about ways to save for retirement—and to find out which retirement stocks may be right for you—subscribe to Cabot Dividend Investor. As the name suggests, dividend stocks are the advisory’s primary focus. But one of its overriding goals is to position you well for retirement.
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