Retiring On Dividend Earnings

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One of the challenges many older investors encounter when retiring is controlling their cash flow to provide appropriate retirement earnings. Unfortunately, common stock dividends come with no assurances as they can change. Companies are not required to pay them, and companies that do can suspend their dividends anytime as their business requirements dictate. Since there are no guarantees for dividends, is it advisable to rely on them when retiring?  The chart below may answer that question.

First, now that companies rarely cut dividends except in extreme economic times such as 2008. And even then, many companies maintained their dividends. We advise to create a varied portfolio of distinct dividend-paying stocks. In case your dividends are coming from a single source, you run the risk of losing what might be a substantial part of your income should the company decide to discontinue their dividend payments (just because you retired from company X and have an allegiance there, it is unwise to have a large portion of your retirement portfolio in one stock). Retiring with a varied portfolio, your normal dividend income stream could carry on, buffered by the on-going payments of the other shares in your portfolio. Although diversification doesn't guarantee against the risk of loss in a decreasing market, it could help to minimize the market unpredictability risk of your general portfolio.

Second, when retiring and building your dividend-income portfolio, look for high-quality companies in market sectors that have historically paid out a steady stream of dividends to shareholders. Avoid economically sensitive stocks like airlines and opt for supermarkets and personal care items.  Discovering these shares is not difficult and there are some good places to start. Businesses in stable industries or in highly-regulated markets including electric utilities are typically great candidates to have in a retirement dividend-income portfolio. These businesses usually encounter less risks to their business and less disruptions of their cash flow, which makes it more unlikely that they would have to discontinue dividend payments.

dividend growth

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Another method to invest for dividends when retiring is to choose a dividend income fund. A dividend income fund provides diversification in a mutual fund. Plus, a fund offers the experience of the expert team of financial analysts and portfolio managers who does the research and chooses the stocks on your behalf. Take note, however, that stocks and mutual funds are investments that entail market risk, and investment return and principal value will vary so that upon redemption an investor's shares might be worth much more or less than the initial worth.

In light of the dangers of possessing stocks of any type, when retiring, dividend-paying shares are the least risky to own because they tend to fluctuate much less than pure growth stocks. The say that the 'proof is in the pudding' so we have provided a chart to show the results of the theoretical investor retiring with a basket of the S&P 500 stocks. As you can see, their retirement income would have risen quite regularly over almost 4 decades and done a lot better than parking money at the bank.

11 thoughts on “Retiring On Dividend Earnings

  1. Leather wallets says:

    It’s appropriate time to make some plans for the future and it is time to be happy. I have read this post and if I could I want to suggest you some interesting things or tips. Perhaps you can write next articles referring to this article. I wish to read even more things about it!

  2. Definitely good advice. It's never too late to start saving for retirement. I prefer Roth IRAs, which I wrote about a while back - http://frugaldad.com/2011/12/13/why-i-stopped-contributing-to-my-401k/

  3. poptropica says:

    I'm a bit uncertain of where you are getting your info, however good topic indeed. I must spend some time studying much more or figuring out more. Thank you for excellent info I was looking for this information and i'll be looking forward for more post from you.

  4. deals says:

    Great way to write, seems I was reading a novel, I loved it at the moment where everything is so technical and the world is in full swing there is nothing better than reading articles like this, to give us a break and go on with our daily tasks . Excellent.

  5. joe says:

    More and more people are going back to dividends for retirement. I remeber the old saying utilities are for widows but now everyone wants a steady dividend payment. i would also look for dividend aristocrats because they raise thier dividends year after year. some etfs and funds invest in them so that would b a easy way to start.

  6. The trick is to find an instrument which is sufficiently safe and profitable at the same time. As we all know, it often a pipe dream that sleazy financial solutions peddlers use to lure unsuspecting investors into poor quality schemes. I think a dividend fund is a good solution, but it's not perfect and risk is involved.

  7. Kate S says:

    What is also important in my opinion, is that companies we invest in shold be free from any sort of debts (also that hidden) and, as you suggested, be on stable growth path.

  8. Ernest Winters says:

    Retirement seems so difficult. The earlier you start, the better!

  9. Achmax says:

    With the help of efficient mortgage rates. I had opened my new IT company . I like this blog it having so much information regarding IT Field.

  10. Doug Meeks says:

    Nice article, solid stuff. I wonder why more people don't jump on this. The market is very confusing these days, and a whole generation of financial professionals and financial service companies are doing business the way it worked during a bull market from the 80's till 2000. This article is about what is working, dividends, slow growth, cash flow. Nothing new in those things, but much has been forgotten. Good article.

  11. Box Office India says:

    Well dividends can provide a bit of regular income, but one should definitely not rely on them alone as it can prove to be quite risky at times.

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