When you buy a stock, part of the money the company pays as its annual dividend gets delivered. Dividends are what makes stocks so great. They’re one of the most common income sources for retirees and an essential component of income portfolios in retirement. Let’s discuss why dividends might be a good strategy for your portfolio and how to build your dividend portfolio based on dividend stocks.
- Dividends Will Make Up Most of Your Retirement Income
Most retirees will rely on the income their portfolio generates for living expenses, and dividends are a big part of that. Many people are concerned about their finances during their retirement years, but this won’t be an issue if you have a solid income from dividends. Dividend stocks aren’t a huge source of growth during your retirement—that’s why they’re called “income stocks”—but if you keep adding to your portfolio year after year, your dividends will grow with the value of the underlying stocks.
- Dividends Can Earn More Than Interest
While interest rates are low, it’s still possible to earn more from stocks than from bonds or certificates of deposit (CDs). Many stock dividends can pay more than higher-yielding alternatives. If your dividend is your primary source of retirement income, you want to ensure it’s as high as possible. However, it would help if you were careful to refrain from using dividends to earn higher returns than is warranted. It will help if you compare apples to apples rather than peaches.
- You Can Use Dividends to Increase Your Income
Think of stocks as something other than just a place to park your money and collect the income. Because you can use dividends to buy or sell more shares, you can exercise greater control over how much revenue your stock portfolio generates. You can also trade the opposite way, letting dividends add up and then using them to buy more shares. Think of dividends as a tool to both generates and increase your income.
- Capital Gains and Dividends Are Taxed Differently
Most people are familiar with the taxes that must be paid on capital gains in retirement. But did you know that dividend payments are also taxed differently? Technically, dividends are a form of income and should be treated as such at tax time. However, the IRS allows anyone who owns stocks (including retirees) to pay taxes on dividends using the more favorable long-term capital gains rate. The only catch is that your dividend must be paid by a U.S. corporation, which generally means that dividends from Canadian stocks won’t qualify. There may be rare exceptions, but you shouldn’t count on them.
- Dividends Pay Well in All Markets
Looking back over the past century, you’ll see that dividend stocks have an impressive record of retiring shareholders safely and comfortably during all market conditions. They’re rock solid and help investors sleep well at night. That’s why building your portfolio with dividend stocks is a good idea.
- Dividends Can Help Concentrate Your Portfolio
Dividends can help you concentrate your portfolio and make it safer by reducing or eliminating the temptation to trade, which causes terrible decisions less likely, another reason why dividends are great for retirees. You’ll have fewer chances to lose money and more opportunities to enjoy solid, dependable growth in the income you pay.
- Dividends Are Good for the Share Price
Dividends help companies grow and prosper, and these benefits trickle down to shareholders, who should also benefit from a rising share price due to strong profitability. If you own shares in dividend-paying companies, you can expect them to rise in value over time.
- Dividends Are Free Money
Passive dividends are like free money! You’re not obligated to buy the stock, and it’s still possible that no company will pay you a premium. But if they do, they won’t be able to put it into their own pockets – those dividends will go to you instead. That’s free money! And it’s money that can be reinvested into the stock to continue the process. You can also use dividends to buy more shares or to trade in the opposite direction (buying more shares with dividends).
- Dividends Are Inflation-Protected
Inflation can devastate your investments, especially those that don’t pay dividends. After all, if your dividend doesn’t keep up with inflation, you’re losing money over time. But with stocks, dividends protect you from inflation because stocks tend to increase in value faster than inflation. Over the long term, your investments outpace inflation and help you keep up with it at the grocery store.
- Dividends Can Help Build a Strong Retirement Portfolio
When building a retirement income portfolio with dividend stocks, starting early and investing consistently over time is essential. That way, when you need the money, you’ll know it’s there – and it may be earning even more than when you originally bought the shares!
- Dividends Are Tax-Free
Dividend payments are not taxed, meaning you can invest your dividends without worrying about Uncle Sam getting a piece of the pie. The money you make from a stock’s dividend will be subject to taxes, which differs from what we discuss here about capital gains and dividends. By starting a retirement portfolio with dividend stocks, you’ll know that every penny of your initial investments will work for you.
- Dividends Are Attractive to Retirees
Many retirees want income that isn’t subject to the rules and regulations of government programs (like social security). Dividends fit this bill perfectly because they’re a money stream directly from the company’s profits (and not from the government). This is one more reason why starting your retirement income with dividend stocks is a good idea.
- Dividends Make Retirement Easier
Because dividends are paid automatically, they’re a source of income you don’t have to worry about. You can relax, knowing that even if the markets turn against you, your dividends will keep coming in, helping you feel secure throughout retirement and get through any bumps.
- Dividends Are Free to Buy
Want to take advantage of dividend stocks? No problem! You can buy them at market price, let dividends accumulate, and buy more shares when cheaper. Using either strategy allows you to purchase shares at a discount, so remember that dividends can bump you into a lower-price purchase.
Dividends are income investors want so badly – because they can help you sleep better at night, build an income stream that keeps growing, cut down on bad decisions and other potentially costly risks, and boost the share prices of your holdings.
Dividend stocks are an excellent way to invest. But they’re only worth investing in if you have the discipline to avoid negative trades and stick with the program.
