I will never make a million-dollar salary, but I am confident I'll hit the million-dollar mark by the time I retire thanks to dividends. My No. 1 strategy for making a million dollars by the time I retire is to invest in dividend-paying stocks and exchange-traded funds (ETFs). When I first became interested in investing in my 20s, I signed up for DRIP (dividend reinvestment plans) by mail with a few major companies that offered the plan to investors. As I grew older, it no longer made sense to have separate DRIPS. I could simply re-invest dividends with the individuals stocks and ETFS (exchange-traded funds) I owned through a discount brokerage firm offering online trading. According to a recent Market Watch article, some financial experts say dividend stocks may be better than bonds as interest rates begin to rise. The article points out that dividend increases have historically outpaced inflation by 1 to 1.5 percent. I also like the fact that I can take a hands-off approach to investing by harnessing the power of dividends.
Re-investing dividends from ETFS
I don't re-invest all of the dividends I earn, but I do re-invest dividends I receive from ETFs. The funds are made up of a variety of different stocks so it's like having an instant diversified portfolio. I keep all of my ETFS for the long-term. Every quarter when I receive a dividend, the money gets used to buy more shares of the ETFS.
Keeping some dividends as cash
I also invest in individual stocks that pay dividends. Instead of re-investing the dividends as shares of the stock, I let the profits go into the money market inside my Roth IRA and Rollover IRA plans. Overtime, the dividend profits add up, which I consider a safety net in case my individual stock goes bankrupt.
Having a stream of income in retirement
I also like dividend-paying stocks, mutual funds and ETFS because they will provide me with a steady income when I'm retired. I plan to build up my positions in dividend-paying stocks and funds so I can supplement my Social Security with dividend income. I won't owe any taxes on the dividends that I receive within my Roth IRA account.
Wondering about a bubble
I've noticed talk lately about whether baby boomers are creating a bubble in dividend stocks and funds. A recent Wall Street Journal article points out older investors are flocking to dividend funds because of the stellar performance. According to a Morgan Stanley report, dividend-paying stocks returned an average of 10.2 percent from 1970 through 2005, which was 6 percent more than stocks that didn't pay dividends. I'm not worried about a bubble in dividend stocks since there are such a wide variety of stocks, mutual funds and ETFS that pay dividends.
I think one of the reasons I am such a believer in dividends is because many of my older relatives and friends have had great success with them. They are able to live a much more comfortable lifestyle in retirement because of the dividends they receive. Also, the dividend-paying funds I own in my portfolio are beating the returns on everything else I own.
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