Those in retirement, nearing retirement or planning to retire some day, need to consider how to support their lives, post-career. Hopefully, you are reading this a number of years before those days and can start planning today. Dividend income can be part of those plans.
There are many possible sources of income in retirement and this post focuses on dividends from stocks or publicly held companies. Many mid and large-size companies pay a percentage of earnings to the stockholders (owners of the company) as dividends every quarter or sometimes, every month.
The Definition of a Stock
“Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing. (source: Stocks Basics: What Are Stocks? | Investopedia)”
There are two main types of stocks: Common Stock and Preferred Stock. This post covers common stocks; preferred stock will be covered in a future article in this series.
“When people talk about stocks they are usually referring to common stocks. In fact, the majority of stock is issued is in this form. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.
Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.” (source: Stocks Basics: Different Types Of Stocks | Investopedia)
Many retirees depend on dividends from common stocks to partially pay for life in retirement. Some may have heard of parents and grandparents owning stock in dividend-paying stalwarts like AT&T, Johnson and Johnson, Proctor and Gamble, and other major companies. Although not close to retirement age, I am preparing for eventual retirement with a small stock portfolio. I own shares of AT&T, and several others that pay me dividends on a monthly or quarterly basis. In May, 2016, I made approximately $29 in dividends from companies and funds that I own. April 2016 netted me around $17 from dividends, and halfway through June 2016, I have $12 with several issues yet to pay.
This may not seem like much money, and compared to high-worth investors, it is not. But I started seriously investing for myself just last year following a series of personal calamities. I also have a professionally managed portfolio that earns considerably more per year. For purposes of this series, I will focus on my personal portfolio and its earnings. My total income-generating portfolio is worth approximately $4700 USD. Every stock or issue or fund I hold is intended to provide income with growth as a secondary consideration.
I re-engineered the portfolio a couple of months ago from growth to income after considerable success with one particular company: Realty Income. A 40% gain in share price allowed me to sell the lot and invest the proceeds in several income generators. I’ve always believed in dividend-paying stocks, but my focus and strategy is more defined and directed now. With this strategy, I hope to make enough income to eventually provide $100 a month in dividends. When I make that goal, I will strive for $250 per month and so on. In the long-run, say 20 years, I believe these goals are achievable.
I continue to add to my portfolio, every month. Currently the amounts are: $100 of Realty Income, $100 of PGX (a preferred ETF), and $50 of AT&T.
I also reinvest all dividends (except one) and buy additional or fractions of additional shares. This reinvesting strategy is common and in the long-term, provides greater earnings.
The above works for me as a pre-retiree, but what about the retired among us?
To illustrate how money can buy stocks and dividends for income, I’ll use a hypothetical $100,000 portfolio.
First, the retiree should be a little more conservative when allocating investment dollars. Presumably, there are limits to available funds and at age 67, more is not likely coming in to the household.
There is no hard and fast rule for investment direction in retirement – much depends on individual risk tolerance and circumstances. First, sensible allocation ranges are key. No retiree should be 100% in equities. Simply, a major market downturn takes time to recover and a retiree may not have that time.
A diversified portfolio contains stocks, bonds, REITS, various industries, and domestic and international companies. This is often best done via a mutual fund where the fund manager is paid to manage the investment results. Again, each are discussed in future posts. This one is about dividends.
According to Ben Reynolds at Sure Dividend , the following are top 10 dividend aristocrat stocks:
Cardinal Health (CAH)
W.W. Grainger (GWW)
Abbott Laboratories (ABT)
Walgreens Boots Alliance (WBA)
Becton, Dickinson, and Company (BDX)
I calculated each of the above using today’s (June 17, 2016) price and dividend payout.
The chart above represents $100,000 invested equally in each of the 10 stocks listed in Ben Reynolds’ list ($10,000 each).
These are companies with a history of paying dividends each and every year for at least 25 consecutive years without a cut or reduction. The total annual amount – $2576.33 – will help supplement social security and other retirement income sources quite nicely.
This represents the power of dividend-paying stocks and why they belong in every investor’s portfolio.
I am not a financial professional and do not claim professional credentials. All investors should perform their own due diligence and recall that prior performance is not predicative of future results. I may or not own any of the listed equities and none are necessarily recommended for given individuals.
This post was originally written on my Quora blog:https://incomestream.quora.com/Dividends-Can-Pad-Income