Is investing in stocks with quarterly or monthly dividends a good strategy for saving for retirement?

Retirement, Investing, Stocks
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3 weeks ago
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Investing in the stock market will always have risks. But generally, investing in the stocks of companies that pay dividends can, over time, result in lower risk, lower volatility or variablity of prices, and provide income.

Dividends are paid out by companies to the stock owners. Aside from Real Estate Investment Trusts (REITs), no company is ever required to pay out a dividend.

Stockholders receive a return on their investment in two ways: Dividends and/or capital gains. Most folks focus on the "buy low, sell high" side of things hoping to score big by buying in at the ground floor of the next Microsoft of Apple. Dividends are typically paid out by a company's management when the company feels that they cannot find as good a use for the net profits by reinvesting in the company. So, they return a portion of the profits back to stock holders.

So, most companies that pay out dividends tend to be large with very stable or established products and customers. They tend to not be flashy, sexy startups. As a result most dividend-paying stocks tend to be slower growth type firms. They may be considered boring or are positioned as "value" stocking versus "growth". This is not an entirely bad thing. Remember the tortoise beat the hare and in investing consistency rules.

But remember that boring can  be good for you in the long run. By receiving a dividend, you can increase your current cash flow or you can use the payout to buy more shares in the company. Over time you'll build a significant position in stocks that may provide an income stream in retirement, one that you don't need to rely on the stock market to provide in the form of higher stock prices.

Dividend-paying stocks can act as a hedge to one of the greatest risks for any retiree: inflation. And research has shown that stocks that pay out a dividend tend to better over time than those that don't. Further research also has shown that the stocks of companies that pay out an increasing dividend tend to do better than both non-dividend paying stocks and stocks with static dividend payouts.

A $1,000 investment spread equally amoung 100 of the highest dividend-yielding stocks starting on January 1, 1957 through December 2009 would have accumulated more than $450,000 assuming reinvestment of dividends. This would have been a 12.5% annual return which would have beat the S&P 500 index by 2.5%.

I tend to recommend and use mutual funds, Exchange Traded Funds (ETFs) or individual stocks of companies that have a history of growing their dividends. These are sometimes referred to as "dividend growers". The most exclusive among these are the companies that have consistently grown their dividends every year for at least twenty (20) years. These are referred to as "Dividend Aristocrats". Then in a class by themsleves are the stocks of companies that have grown their dividends every year for at least fifty (50) years. These are referred to as "Dividend Kings".

Most of these companies are not going to be sexy to talk about. But they are consistent. And that means you'll have a lower risk profile in your portfolio if you hold some of these.

To protect yourself, you'll want to limit your exposure to companies that have a sustainable payout. Experts may haggle about this point but generally you should look at companies that limit their payouts to no more than 65% of their net profits. There are all sorts of additional filters you can consider. For instance you can limit your stock selection to those with a payout at least equal to the S&P 500.

 

 

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