DIVIDEND STOCKS FOR RETIREMENT

Recently, I was a featured panelist on an online retirement forum hosted by financial content giant, Seeking Alpha.com. The forum focused on stock exposure during retirement. Should retirees continue to own stocks? How much should they own? What types of stocks and in what form (i.e. individual stocks or mutual funds and ETFs)? While each of the 3 panelists had their own, different opinions to each of these questions, there was unanimity regarding the importance of retirees owing dividend paying stocks as a large part of their stock exposure.

What Are Dividends?

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business, or it can be paid to the shareholders as a dividend.

How do Dividends Help?

There has been a lot of research done on the impact of dividend investing versus non-dividend investing. According to a report from Lebel Harriman:

“Dividend income has represented roughly one-third of the monthly total return on the Standard and Poor’s 500 since 1926. According to S&P, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s–in other words, more than half that decade’s return resulted from dividends–to a low of 14% during the 1990s, when investors tended to focus on growth. If dividends are reinvested, their impact over time becomes even more dramatic. S&P calculates that $1 invested in the Standard and Poor’s 500 in December 1929 would have grown to $57 over the following 75 years. However, when coupled with reinvested dividends, that same $1 investment would have resulted in $1,353. (Bear in mind that past performance is no guarantee of future results, and taxes were not factored into the calculations.)”

Dividend paying stocks also tend to be less volatile than stocks that don’t pay dividends because investors view dividends as an extra cushion in falling markets.

Re-Allocate

As I mentioned in the forum, I believe that retirees need to really reduce their exposure to stocks ( this applies to retiring in Israel as well). Retirement is no time to try and aggressively grow your portfolio. In fact, I think that as individuals approach retirement (within 5 years), they should take a step back and get their portfolios more conservative in nature. Investors need to realize that markets can fall dramatically and if they are near retirement, a big market hit can put a major dent into retirement plans. I can’t tell you how many people have come to me trying to figure out how to achieve their financial goals for retirement, after they watched their investments lose 40% of their value over the last 2.5 years because they were far too heavily invested in stocks.

Enhanced Income

Now I am not against retirees investing in stocks; it’s just that I think that current financial planning models are far too aggressive in their recommended stock allocations. I know many financial planners who have no problem advising clients to have up to 70% of their retirement portfolios in stocks, regardless of their financial situations. The recent market crash shows how irresponsible an approach this is. I’m of the opinion that retirees should limit their exposure to stocks to about a third of their portfolio in most cases.

The question then is: how to allocate that one-third percentage to stocks? The beauty of investing in dividend paying stocks is that you get the best of both worlds. Not only do you get the potential capital appreciation that stock investing gives you, but you also receive a steady income stream that is at least as competitive with — if not more than — investing in bonds. With more than a few large, blue-chip companies paying dividends that are in excess of 4% annually (compared with about 2% for a highly rated bond), many retirees can enhance their income streams with these stocks.

Not all dividend stocks are equal. Investors chasing very high dividend payers can often get burned as companies cut back on their dividends. Not only will they lose the dividends, but frequently, in such situations, the stock price plummets as well. Speak with your financial advisor to learn how to choose and use dividend paying stocks in your portfolio.

 

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il