Retirement Savings: How Much Do You Need To Live Off Your Stock Dividends?

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With an inflationary environment and rising rates, retirement planning has been hard to navigate for many Americans. One potentially steady, reliable source of income that can be particularly well-suited for retirees is dividend stocks. These are stocks that pay stakeholders quarterly.

Companies that pay regular dividends are almost always profitable and have well-defined long-term growth outlooks. In addition, income stocks have been significant long-term outperformers, when compared to stocks that don’t offer dividends.

They also tend to perform well in inflationary environments.

“By offsetting the erosion of purchasing power that occurs during inflationary updrafts, dividend payments may serve as a de facto inflation hedge,” said Peter C. Earle, economist at American Institute for Economic Research. “Although one should consult with a financial planner to take into account their personal financial situation, reliably income-producing (dividend-paying) stocks likely have a place in retirees’ portfolios, both to supplement income and fight the impact of inflation.”

Retirement Strategy

One of the largest benefits to a dividend stock is that you can receive income from the dividend plus the capital gain when you sell the stock — or you can draw continuously from the stock without ever giving up ownership.

There are two ways to go about it. One, you hold dividend stocks in a retirement account, like your IRA. An IRA requires you to start taking withdrawals at age 72. But, instead of drawing down the full distribution from the IRA, you can transfer the dividend income from the underlying IRA to meet the minimum distribution requirements. This way, the stock remains in the account and keeps doing its job, and you still receive the outflow it produces in the form of dividends.

Are You Retirement Ready?

The other option is to own the dividend stocks outside of a tax-advantaged retirement account. This gives you a little more control but also more direct exposure to the stock and its performance. This option also requires a bit more monitoring, as you have to act as your own fund manager.

An easy way to start is to take a look at what’s called the S&P 500 Dividend Aristocrats, an index that measures the performance of S&P 500 companies that have increased dividends every year for 25 consecutive years. In addition, constituents must have a float-adjusted market cap of at least $3 billion and have an average daily trading volume of at least $5 million.

There are currently 66 stocks in the index. Two examples of well-known companies on this list are Walgreens, which offers a 6.54% dividend yield, and T.Rowe Price, which has a 4.11% dividend yield, according to Simply Safe Dividends.

Some other dividend stocks favored by famed investor Warren Buffett include Apple, Occidental Petroleum and Bank of America.

Perhaps the greatest benefit to this strategy is the ease with which investors can build solid investment principles. Brian Bollinger, founder of Simply Safe Dividends, told Barron’s, “A big appeal of dividends is really that it’s kind of psychologically easier to stay the course. … You are focusing on building this growing income stream regardless of market conditions.”

Are You Retirement Ready?

The index is up 5.13% year to date, as of July 18. In the past year, it is up 10.44%. By comparison, the S&P 500 is up 19% year to date and the tech-heavy Nasdaq is up 36.7%.

Are You Retirement Ready?

The staying power of this strategy lends itself well to retirees looking for both income and underlying value. It can also benefit those just starting to think about retirement who want an easier way to add to an investment and stay in it for long periods of time while reducing some of the worry.

Georgina Tzanetos contributed to this report.

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