One of the challenges numerous retirement advisors address with clients is generating income from dividend stocks while mitigating volatility. Unfortunately, typical stock dividends come with no assurances. Companies aren’t forced or required to pay them, and in tough economic times, companies could postpone their dividends at any time as their company needs dictate. Because there are no assurances for dividends, ought you depend on them when doing retirement financial planning for income? A seasoned retirement advisor will indicate the time proven benefits.
First, crate a varied portfolio of different dividend-paying shares as any retirement advisor recommends and any sound retirement financial planning demands. If the dividends are coming from a single source or industry (e.g. banks), you run the risk losing what could be a significant part of your income should the industry fall on difficult times and cut or cease dividend payments. With a varied portfolio, your regular dividend income stream may continue, buffered by the on-going payments of the other stocks in your portfolio even if others have an interruption. Even though diversity does not guarantee against the danger of loss in a declining market, it can assist to minimize the market unpredictability. In the event you don’t have enough assets to build a diverse portfolio of dividend paying stocks, then select a mutual fund specializing in dividend-paying stocks.
Second, consider the premise of sound retirement financial planning being consistency of revenue. So when building your dividend-income account, a good retirement advisor will tell you to search for high-quality companies in areas which have historically paid out a constant stream of dividends to investors. Discovering these stocks is not difficult, and there are a couple of good places to begin. Businesses in stable sectors or in highly-regulated markets such as electric utilities are typically great prospects for a dividend-income portfolio. These companies usually face less threats to their business and fewer interruptions of their cash flow, which makes it less likely that they would need to stop dividend payments.
Dividend Growth of the S&P 500 over time
Cautiously consider the graph above in your retirement financial planning. The older we get, the more inclined we might become to invest in money market funds or short term CDs – those products that feel secure. But these usually pay low income and also the level of revenue is fixed. But think about the income stream on the S&P 500 index. Your income would have climbed handsomely over the years. The same money in bank CDs would have resulted in an ever shrinking income.
Another method to invest in a diversified collection of high-quality dividend-paying stocks is to select a dividend income fund. A dividend-income mutual fund provides diversity — the hallmark of sensible retirement financial planning. Plus, a fund provides the knowledge of a professional money manager who does the analysis and selects the stocks for you. Take note, however, that stocks and mutual funds are investments which entail market risk, and investment return and principal will vary so that upon redemption an investor’s shares might be worth more or less than the initial value.
See our related article on income from preferred shares.
Dividend stocks offer a great alternative for retirement income now more than ever with treasury bonds yields so low. A good diversified portfolio of dividend stocks and bonds should offer a good supply of passive income for years.