Income-yielding investments can be an integral part of your retirement lifestyle planning. Incorporating dividend growth investments into your retirement plan doesn’t have to be difficult. When choosing investments that will provide a steady stream of income, look beyond just fixed-income securities like bonds, CDs, and money market funds. Stocks, too, can be an important source of investment income.
Not Just Bonds—Stocks, Too!
Stocks that pay dividends can play an important role in your income-yielding investment strategy. Bonds, CDs, and money market funds may seem like a stable choice, but may not yield healthy returns in today’s low-interest market conditions. Stocks, however, can be important players in your portfolio as income-yielding investments. Let’s learn more about dividend growth as a part of your retirement lifestyle planning.
Companies That Pay Dividends
Companies that pay respectable dividends are generally well-established, growth-oriented companies. Johnson & Johnson, for example, increased their dividend payout every single year between 1963 and 2004.1 Additionally, emerging markets companies are increasingly offering dividends alongside more established, well-known firms.
However, you want to be cautious about investing in companies that have increased their dividends drastically over a short period of time. If you see a large increase in dividend payout, consider whether the company’s growth may be overly optimistic and unsustainable into the future.
Calculating Dividend Yield
Dividend yield is calculated by dividing the annual dividend per share by the stock’s share price: a company with a share price of $100 and a dividend of $5 per share has a 5% dividend yield.2 On the S&P 500, the average dividend yield is 2-3%.1
One of the reasons dividend investing can be such a powerful tool in your overall investment planning is that it increases your overall return. For example, if you purchase a stock that goes up by 6% in a year while simultaneously paying a 4% dividend, then you have earned 10% on your investment.
Considering the Risks of Dividend Growth
It’s tempting to become overly focused on dividend yield and lose sight of your overall investment goals. The fact that a company offers dividends doesn’t necessarily indicate a good, healthy company. Dividends are paid out of a company’s net income, so higher dividends mean that the company retains lower earnings, and a company that doesn’t reinvest enough money into operations can soon find itself in trouble.
Therefore, it’s important to carefully screen dividend-yielding stocks to ensure that the companies’ operations are sustainable and dependable. Your financial advisor can be incredibly helpful for this kind of screening and advice.
Always Consider Taxes
When it comes to your long-term financial planning, it’s always wise to consider tax ramifications. Check with your financial advisor, accountant, or tax attorney for more information before you begin investing in dividend-yielding stocks. Careful examination of your personal and local tax situation can help you to decide if dividend yield is an advantageous strategy for your portfolio.
For more information about dividend strategies, our Wealth Managers are here to help. Give us a call at 1-800-541-7774, start the conversation by email or learn more about how we might help you.
Sources:
1. Investopedia
There are no guarantees that dividend paying stocks will continue to pay dividends. In addition, dividend paying stocks may not experience the same capital appreciation potential as non-dividend paying stocks. WrapManager, Inc. does not advise on any income tax requirements or issues. Use of any information presented by WrapManager, Inc. is for general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
