That’s only one reason for adding dividends to your strategy for retirement. Continue on for seven more reasons why dividend stocks are the MVPs of every smart investor’s retirement.
In a downturn, good dividend payers are the bright points in your portfolio. They might take a temporary hit on their share price, but they still give you cash. When other positions you own are losing money, you will appreciate these little payments for the psychological comfort they provide.
2. Dividend yields vs Treasury maturities
A good dividend stock could yield 1% to 3% per year. Consumer company Colgate-Palmolive (CL) gives 2.28%, for example; McDonald’s (MCD) gives 2.20%, and pharmaceutical giant Johnson & Johnson (JNJ) yields 2.49%.
These numbers are comparable to the yields on 20-year Treasury bonds. But short maturity Treasury yields are not so competitive. Seven- to 10-year bonds give between 1% and 1.8%, and five year maturities are under 1%.
3. Dividends and retirement accounts
You can accumulate a larger stake in dividend stocks by reinvesting the payments in the years before your retirement. That’s far more easy in a retirement account where you pay no taxes.
4. Dividends and inflation
Some dividend companies increase their payments every year. Those that grant annual dividend increases for more than 25 years in a row are rare gems. Once a company gets into this level of dividend, the executive team is very motivated to maintain it. Which is great because the rising dividend helps you combat inflationary increases in your living expenses during retirement.
5. Consistent dividends
Since we are talking about dependable dividend companies, take a moment to consider the achievement of raising dividends for 25 years or more. That takes a focused executive team as well as a good business model that produces plenty of cash. Those same benefits make good dividend stocks great as long-term parts of your portfolio.
6. Dividends and appreciation
Unlike bonds, your dividend stocks also increase while they are giving you cash. For instance, McDonald’s, Colgate-Palmolive, and J&J have all three had average annual gains of 9% over the past decade.
7. Dividends and cash
Dividend companies give you cash, and that is crucial to ensuring your retirement in comfortable. When you use your dividends to fund your retirement distributions, you’ll be less dependent on liquidations. Fewer liquidations will maintain your earnings power and lower your risk of selling your investments at a bad time.
Reliability and stability
There is no guarantee any company will keep paying you a dividend, just as there is no certainty any stock will increase. To avoid these risks, you have to stay out of the market completely, which could mean missing out on your retirement goals.
Dividend payers are not without risk, but they are more reliable and stable than their peers that don’t give dividends. And those are the benefits you want from these retirement MVPs.