5 reasons to invest in dividend-paying stocks for retirement
If you’re like many investors, you ignore dividend-paying stocks, assuming they’re too heavy for you. Maybe you’re more drawn to high-end growth stocks that could fly higher. If so, you are doing yourself and your portfolio a disservice as dividend paying stocks are powerful portfolio boosters.
Here are five reasons why you should consider adding some (or more) dividend paying stocks to your portfolio.
N ° 1: The dividend gives the best bank and bond rates
Let’s start with dividend yields: Nowadays, and for many years now, the dividends of many stocks have easily exceeded the interest rates offered by banks and many bonds and certificates of deposit (CDs).
Consider that the national average interest rate for a savings account was recently 0.05%, while five-year CDs offered 0.34%. A five-year US Treasury bond recently posted a yield of 0.38%, while a 30-year Treasury bond offered 1.69%. During this time, Coca Cola (NYSE: KO) the dividend recently yielded 3.1%, and AT&T (NYSE: T) sported a heavy dividend yield by 7.1%.
N ° 2: dividends have advantages over annuities
Fixed annuities are an undoubtedly attractive option for many retirees: you hand an insurance company a large wad of cash and in return you can receive a regular injection of money for a set period of time or for the rest of your life. The benefit is clear: No more worries about the stock market crash and your nest egg squeezing, and retirement income you can trust. The downside, however, is that the money you spend on this income is … spent. Faded away. It will not be there for your children to inherit.
With dividends, however, you can have your cake and eat it too. As long as you have invested in very healthy and reliable dividend paying stocks, you can be assured of regular income without having to sell stocks – and when you die, those stocks will remain for your heirs. (“Stocks for heirs!” – a great slogan.) With a $ 500,000 portfolio of dividend paying stocks and an overall average return of 3.5%, you envision an annual income of $ 17,500.
# 3: dividends deliver a punch
Not only will the portfolio example above generate $ 17,500 in annual income, but that income will increase over time, as healthy and growing companies that pay dividends tend to increase their payouts every year or every few years. . If that 3.5% return becomes 3.75% the following year and 4% the following year, you will receive $ 18,750 and $ 20,000 respectively during those years, and increasing amounts beyond.
But wait, there is more! Stocks that pay you dividends will also increase in value over time. A $ 50 stock, if tied to a growing company, will ultimately be a $ 60 stock, $ 80 stock, and $ 100 stock – and can split its stock from time to time as well.
# 4: dividends help you keep up with inflation
All of these increasing payments have one particular advantage: they can help you cope with inflation. For many years inflation has averaged around 3% per year, although there have been years of very high inflation and a few years of very low inflation. A rate of 3% can cut the purchasing power of your money in half over a period of about 20 years, which could make life difficult after retirement. But if your dividend income is growing at a faster rate than inflation, those payments will actually increase your purchasing power over time.
# 5: dividends can increase Social Security checks
Finally, dividend income is a powerful support in retirement when combined with Social Security checks – partly because social security income is also designed to keep up with inflation. In most years, Social Security benefits receive a cost of living adjustment (COLA). You can get an estimate of your future benefits from the Social Security Administration website, but be aware that the average monthly pension benefit check was recently $ 1,523, or about $ 18,000 per year. If you’ve earned more than average in your working life, you’ll get more than that.
Dividends are not perfect, because sometimes even good companies have to reduce, suspend or eliminate their payments. And the value of some dividend-paying stocks will decrease rather than increase over time. But if you spread your money over a range of promising and growing companies with strong balance sheets and competitive advantages, you will likely be doing this for many years to come.
Pay serious attention to dividends for your portfolio.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.