If you're like most people, you've spent much of your adult life working and, if you're smart, saving some of the money you made and investing it.
During this "accumulation phase," you built wealth and resources to provide an income source for yourself in retirement. You watched your portfolio grow, but you didn't tap into it.
But now a change is coming. You're retiring. And while you want your portfolio to keep providing returns, you also want it to give you income to use for your day-to-day expenses and to live the lifestyle you dreamed of.
If you're working with an adviser, he's probably talked to you about this "distribution phase" and has been helping you prepare for it.
Much of that conversation should have been about moving to a safer investment strategy to protect the money you worked so hard to save.
Why dividends are attractive to retirees
If you haven't already, it's a good time to think about dividend investing as a part of that plan -- building a collection of solid stocks with dividend yields that generate money throughout the year.
If you own stock, you know it goes up and down on a daily basis. The price changes to whatever somebody is willing to pay for it at the time; you hope it will continue to go up, but that's not always the case.
But if it's a company that pays dividends, it also will pay you cash that can be deposited into your brokerage or bank account. You get paid for owning that stock.
At a time when you're looking for safety and security from your portfolio, dividend-paying stocks can be a good investment. Dividend payers historically outperform other investments over the long haul, with quite a bit less volatility. And it's nice to know that if you need to take a 4% withdrawal from your portfolio, 3% or 4% will come from dividends, so you don't have to put all your hope in that ever-changing market.
You know your portfolio is going to pay you for owning it.
What to watch out for
Still, you have to be careful when shopping for dividend-paying stocks. You can't just pick stocks that pay high dividends. Do a little homework. Is the company healthy? Is it profitable? There are companies out there that pay high dividend rates, but they are losing money. The money they're using to pay those dividends might be coming from borrowed funds, and when a company isn't healthy financially and still pays a high dividend, you risk watching that stock go down to a point where it might not recover or, at best, it recovers slowly.
Companies with a history of paying dividends consistently, and increasing their dividends, are usually household names, such as Coca-Cola (KO), Pepsi (PEP ), General Mills (GIS) and Procter & Gamble (PG ). Financial companies often increase their dividends, as do health care companies. If you don't want to pick individual stocks, you can choose a dividend growth mutual fund or a dividend growth exchange-traded fund (ETF). Your adviser can help you or do it for you.
Follow a long-term game plan
The idea with dividend investing is to not over manage. Plan to stick with that stock for a long while (unless something really catastrophic happens, or there's a change of course within the company).
You don't want 100% of your investments to be dividend payers, but there should be a good portion of your portfolio that pays you for owning it. Even if you're not in the distribution phase yet, it can make sense to have some dividend payers in your portfolio, because then you have the miracle of compound interest: You can take those dividends and reinvest them.
But especially when you're in the income phase of the investment life cycle, when it's all about cash flow, having dividend payers in your portfolio makes it easier to achieve success.
Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Fixed Insurance and annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Global Financial Private Capital.
This material is for informational purposes only. It is not intended to provide tax, accounting or legal advice or to serve as the basis for any financial decisions. Individuals are advised to consult with their own accountant and/or attorney regarding all tax, accounting and legal matters.
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Copyright 2017 The Kiplinger Washington Editors