The following is a guest blog post:
Retirement planning is more than just your savings and your social security compensation; you must look at every asset you have and make it work in your favor to produce the most capital and create the most comfortable retirement life possible—especially as you reach your retirement years and options for generating new income are difficult to come by. Dividend income paid from shares of stock can be a major facet of your retirement budget, if approached intelligently.
What is Dividend Investing?
Investing in a stock that pays a dividend is an excellent way to supplement existing retirement income (pension, 401k, social security, reverse mortgage, annuities)—and if you are not in need of a monthly payment (for simply owning a stock) you can reinvest your dividend payment to buy more shares. Clearly, you will not be able to live off dividends alone, but they are a strong (and smart) addition!
How to be a Successful Dividend Investor and Knowing the Benefits
1. Reinvest your dividend income into qualifying stock accounts. This should be straightforward, but there are two types of dividend accounts: qualified and unqualified. When it’s time to pay taxes, you will be thankful you invested in qualified accounts (most are qualified, so it makes it easy). Qualified accounts are taxed at the capital gains tax rate, which is 15%, but depending on your retirement income configuration, you might be in the 10-15% income tax bracket range and be able to pay zero capital gains tax!
2. Understand that dividend yield out paces inflation. This is one of the biggest benefits of channeling investment dollars into qualifying stock accounts, even if the market experiences inflation, you will still be paid while holding your stock and it will offset the hit of inflation. Do not be tempted to sell shares, look at your quarterly dividend cash flow and wait-out the market, if you can.
3. Study companies and track their history for consistent dividend growth or payout history versus cyclical payouts. To put this into perspective, think about major oil companies, these companies go in cycles, and if the market gets too bad, they may have to stop dividend payments. Consider long-standing stable industries that will fluctuate with the market but stay relevant. If you do your research and do not base investments solely on dividend yield, you will be on the right track.
What to Avoid as a Dividend Investor
1. Do not depend on dividend income for monthly bills and expenses, in the event the market crashes, have back-up funds available so you are not forced to pull all dividend investments from the market—as mentioned above, stocks are best kept in the market for as long as possible.
2. Dividends are not a guarantee, be prepared for dividends to halt, this is again a reason retirement planning is about taking note of all the avenues to gain income, not dependence on one facet. Stemming from not guaranteeing dividends, it is wise to diversify your portfolio– if one stock is doing well, another doing not so well will not be a major shock or issue with your finances.
3. There are risks. As an investor in dividends, you are betting on the dividends for income and less-so on the payout. Some companies are forced to pay a certain amount out in dividends and this brings down the overall value of a payout if you sell your share. You have to accept that the market changes and so do high-yield industries, the only way to have a conservative-low risk portfolio is to know how businesses will perform in the future and that is nearly impossible!