To eliminate stocks from your retirement income plan would be a mistake. Not only are some stocks significant income stocks (dividends of 4% annually and more) but their growth in dividends serves as protection from inflation.
Has the price of food increased at the supermarket? Has the price of clothes increased? Who received those higher prices? The manufacturers of food and clothing. YOU could have been an owner in agricultural or food processing companies or clothing manufacturers. Instead of bearing the burden of higher prices without offset, you can be a participant of growing dividends from income stocks.
Income Stocks vs Insured CDs
The chart below shows why during a 30-year retirement (e.g. from age 60 to age 90), the increasing income from stocks is essential as compared to holding money in bank CDs.
Data 12/31/75 through 11/30/15. Dividends based on a $10,000 investment 12/31/75 in a basket of stocks representing the S&P500 from American Funds Distributors. Interest rates from Federal Reserve year end rate on 1 yr CDs. You cannot invest directly in an index. Past performance is not a guarantee of future results and an analysis of a different period may have revealed different results.
Using the above chart, answer for yourself: "Have the dividends from income stocks been more reliable than interest from insured CDs?"
A very sound method for investing in income stock is the Dow Dividend Strategy. This strategy has you buy the ten highest dividend yielding stocks in the Dow Jones Average. These are listed below as of 12/11/08 (see current list at www.dogsofthedow.com).
|NYSE / NASDAQ||The Dow stocks ranked by yield on 12/11/08||on
|BAC||Bank of America||14.91||8.58%||Yes|
|JPM||JP Morgan Chase||29.94||5.08%||No|
As you can see from the "yield" column, these income stocks pay very healthy dividends and this strategy of annual rebalancing this portfolio of ten highest yielders has persistently outperformed the market over the past few years as well as past few decades (see long term history).
This is certainly not the only method of buying income stocks. But hopefully we have made the point that over time, retirees need the power of growing dividends from income stocks.