Good Ways To Think About Dividend Investing For Retirement
Today I’m going to compare and contrast 3 dividend retirement strategies.
And how each one can serve to meet different investment objectives. It’s a perfect discussion for anyone desiring dividend income. To partially or fully fund their retirement years.
Why?
Because sticking to a sound investment strategy. Is critical for successful long-term total returns on your investments. Even more so when your retirement and financial well-being depend on it.
With those initial thoughts in mind. Let’s get moving…
3 Dividend Retirement Strategies For Guiding Your Investment Decisions
Here are the 3 dividend investment strategies for retirement we are going to review today…
- High dividend growth and dividend reinvestment
- High dividend yield and dividend harvest
- Balanced growth and dividend income
Furthermore, the dividend payments generated by these different approaches can supplement your other sources of retirement income. Be they from social security, private pensions, employer-sponsored retirement accounts, or part-time work.
Perhaps in the best case. You can earn all the dividends needed to maintain your retirement lifestyle.
But before I dive into the details of building wealth for retirement with dividends. I would like to step back for a moment.
And lay in some background information for you…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Then, when you are done. But before you go. Please check out our…
Complete Guide to Dividends and Retirement
Otherwise, let’s continue with today’s article…
How Investment Strategies Connect With Retirement And Dividend Stocks
Because first, what I want to do is connect the dots between investing, dividends and retirement planning.
Here goes…
What Is An Investing Strategy?
First, an investing strategy is a way of thinking about your investments. Including a set of guiding principles to follow.
Taken together they make up an approach that governs your decisions about what to invest in. And why.
What Is A Dividend Investing Strategy?
Next, a good dividend investing strategy provides a more specific framework. To guide your investment decisions in dividend-paying stocks.
As a result, it helps you to decide what specific dividend stocks to invest in.
What Is A Dividend Retirement Strategy?
Finally, a dividend retirement strategy further refines your approach to investing in dividend stocks.
Because you now have a specific goal. It is to retire with dividends. And receive dividend payments to fully or partially fund your post-work lifestyle.
Then depending on your level of wealth. And your time remaining before retirement. Your dividend retirement strategy can take different approaches.
And those different approaches are exactly what I want to discuss today. But not so fast.
I have one more important topic. Before moving on to the 3 dividend retirement strategies.
Important Characteristics Of Dividend Stocks
Here is my description of the perfect and most desirable dividend stock to buy and hold forever. It is a stock that…
- Pays substantial dividend income today
- Increases the amount of that dividend annually
- Has a rising stock price over the long run
Unfortunately, when considering these characteristics, not every dividend stock measures up equally.
As a result, what we find are the stocks that often excel at numbers 2 and 3. But typically do not pay a substantial dividend income currently. In other words, they have a low dividend yield.
While stocks with higher dividend yields. Thus, paying a substantial dividend income right now. Tend to fall short on items 2 and 3.
Thus, resulting in a stagnant stock price. Also, minimal if any dividend growth.
However, outside of experiencing a dividend reduction. Neither of these two extremes is good or bad. They are just different.
Most importantly, they form the basis for today’s 3 dividend retirement strategies. So, let’s go through them now.
And if at any point, you feel a little overwhelmed with this topic and the terminology. I suggest you check out this article…
The Basics of Dividend Investing Every Investor Should Know
Otherwise, let’s keep moving…
Dividend Retirement Strategy #1: High Growth And Dividend Reinvestment
Our first dividend stock retirement strategy emphasizes stocks with rapid and sustainable dividend growth.
The growth is supported by businesses that have ample opportunity to increase revenues and profits well into the future. Also, a management team that desires to reward stockholders with higher dividends per share every year.
What Are The Characteristics Of Dividend Stocks Within This Strategy?
There are no hard and fast rules. However, I will put forth some general guidelines for you to consider.
Thus, an investor pursuing this dividend investing for retirement strategy would seek out dividend stocks with these characteristics…
- Dividend yield of more than ½% but less than 3%
- Track record of increasing the dividend every year
- Potential for annual dividend growth between 8% and 12%
- Lower dividend payout ratios – often much less than 50%
These points become the guiding principles. For selecting and buying specific stocks that pay dividends.
For example, some stocks and exchange-traded funds (ETFs) paying dividends that fit this strategy include:
- Apple (AAPL)
- Automatic Data Processing (ADP)
- Microsoft (MSFT)
- NextEra Energy (NEE)
- Vanguard Dividend Appreciation Index Fund (VIG)
Stocks like these are often referred to as dividend growth stocks. Some, like Apple and Microsoft, have delivered amazing growth plus a dividend.
Who Is This Dividend Retirement Strategy Best For?
Because this approach offers less income today. It is perfect for younger people in their prime working years.
For example, an individual with 20-30 years before retirement. Thus, having plenty of time to benefit from the growth these stocks have to offer. Able to endure the ups and downs of the stock market.
Also, it can work well for an older person with less time until retirement. Mainly for those retirees who will have other retirement income sources. And won’t be entirely dependent on dividends to fund their living expenses.
In either case, the investor does not currently need the dividend income. Allowing them to reinvest dividends back into their retirement portfolio of stocks.
And benefit from the long-term compounding of dividends. And the wealth effect that is created from them. That this strategy and the stock market offer.
Okay. Let’s move on to strategy number 2…
Dividend Retirement Strategy #2: High Dividend Yield And Dividend Harvest
Our second dividend investing for retirement strategy emphasizes stocks with higher dividend yields.
Where the current dividend is well supported by stable and sustainable business profits and cash flows. However, the company’s growth prospects are either limited, uncertain, or both.
In addition, company management desires to reward stockholders with steady and recurring dividend payments. And usually do so every quarter of every year.
What Are The Characteristics Of Dividend Stocks Within This Strategy?
Once again, there are no specific rules. But I can offer some guiding principles for selecting stocks that meet this dividend stock retirement strategy.
So, I suggest that an investor using this approach seek out dividend stocks with these characteristics…
- Dividend yields of at least 5% or more
- Companies with a long-term track record of paying steady dividends
- Potential for annual dividend growth of 1%-4%
- Higher dividend payout ratios – often more than 75%
Finally, some stocks that fit this strategy include:
- AT&T (T)
- Altria (MO)
- Enbridge (ENB)
- Verizon (VZ)
- W.P. Carey (WPC)
Who Is This Dividend Retirement Strategy Best For?
This investment approach is most suitable for someone who needs to maximize their cash flow now. Using dividends to pay the bills in retirement now or very soon.
Rather than reinvest the dividends. This investor harvests those dividends in cash. And spends them to meet their living expenses and support their lifestyle.
However, these stocks generally won’t offer as much in the way of rapid dividend increases. Or the potential for high capital appreciation.
Finally, one word of caution before we move on. It is that higher dividend yields can indicate greater investment risk.
Specifically, the potential risk of a dividend reduction. So, doing your research before you buy is important. To understand the level of safety surrounding the company’s dividend.
Because dividend reductions typically are accompanied by steep drops in the price of the stock. So, be careful and understand what you are investing in.
After all. It’s your money!
This brings us to our last strategy of the day…
Dividend Retirement Strategy #3: Balanced Growth And Dividend Income
Our final dividend investing for retirement strategy emphasizes the middle ground. What I like to call the “sweet spot” for us dividend investors.
It is the strategy I have followed. For most of my time as a do-it-yourself dividend investor. Identifying stocks that…
- Pay a decent amount of dividend income today
- Have a dividend with solid growth potential
- And a stock price that will likely rise over the long run
…all supported by a stable and growing business model. Plus an outstanding historical track record of regular, recurring, and growing dividend payments.
What Are The Characteristics Of Dividend Stocks Within This Strategy?
An investor using this approach seeks out dividend stocks with…
- Dividend yields between 3% and 5%
- Companies with a long-term track record of paying steady dividends
- Potential for annual dividend growth of 4%-8%
- Have a moderate dividend payout ratio – often between 40-60%
Finally, some stocks and mutual funds that fit this strategy include:
- 3M (MMM)
- AbbVie (ABBV)
- American Electric Power (AEP)
- Clorox (CLX)
- SPDR S&P 500 High Dividend ETF (SPYD)
Who Is This Dividend Retirement Strategy Best For?
This is a great retirement dividend income strategy for anyone who can sacrifice some current dividend income. In exchange for more dividend growth and stock appreciation over time.
Perfect for those who do not need to spend the dividends now. And can reinvest them to compound wealth and their future dividend income stream.
Or, for those who need to cash out their dividends and spend them. But, don’t want to give up on all the dividend growth and capital appreciation potential these types of dividend growth stocks can offer.
Okay. I promise to wrap this up. But one more important point before I do…
Finding The Right Stocks For Your Dividend Retirement Strategy
Each of today’s approaches to investing in dividend-paying stocks for retirement relies on selecting stocks with certain metrics. And you may be wondering how to go about finding those very stocks.
For this, I suggest the Simply Investing Report and Analysis Platform.
Simply Investing offers an easy-to-use interactive database covering hundreds of stocks. Including all of the current dividend metrics, I discussed today. Plus many more.
In addition, Simply Investing provides recommendations on the top dividend stocks. And the best time to buy them. Helping you to sidestep overvalued or underperforming companies.
It’s the perfect companion. For putting together your dividend stock retirement portfolio. And for monitoring your stocks regularly.
Thus, Simply Investing does much of the work. So you don’t have to!
You can learn more about Simply Investing here.
Okay. That’s all I have for today.
Allow me to wrap up with a few parting thoughts…
Dividend Retirement Strategies
Dividend investing your way to financial freedom is entirely possible. But you need a plan and a good way to go about it.
So, here are the 3 dividend investment strategies for retirement we reviewed today…
- High dividend growth and dividend reinvestment
- High dividend yield and dividend harvest
- Balanced growth and dividend income
From my perspective, if you are going to be a dividend investor. You might as well have a well-thought-out strategy for basing your investment decisions.
Then you can start building out your dividend retirement portfolio right now. Especially if you want to retire with dividends in the future.
Because this isn’t “fun money” we are talking about. No way.
It’s your retirement money. So, select a dividend retirement strategy, make a plan, and invest your money wisely.
Before you know it, you will be living off dividends. And your “golden years” will glow a little brighter.
That’s it. But before you go, check out some of our…
Other Great Dividend Investing Articles
…to take your dividend investing game up a notch.
Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.