recently, New Retirement Facebook GroupAt , there was a lively discussion on the pros and cons of investing in dividends as a source of income after retirement. Let’s look at some pros and cons.
Are dividends like golden geese or big goose eggs?
First, what is a dividend that generates investment? And how are people using it as retirement income?
A dividend-producing investment is a financial asset that produces regular income in the form of dividends. Dividends (dividends) are often made by established and profitable companies as a means of providing a portion of their earnings to shareholders. They serve as a means of distributing profits and returning value to shareholders.
Some retirees rely on dividend income from investments for their daily living expenses. Dividends can be used to fund ongoing expenses such as housing, medical care, utilities, groceries, and other essentials. A regular source of income through dividends allows retirees to meet their financial needs without having to sell their investments.
However, it’s important to note that many people reinvest their dividends.
Advantages and disadvantages of investing dividends as retirement income
Using dividends to generate retirement benefits may seem like a great idea. Somewhat predictable income while preserving the original nest eggs. However, not everyone sees it that way.
A Facebook poster who started a conversation about dividends wrote that selling investments for income is an equivalent, if not a better, way to generate a retirement income stream. . He said:
“Living on dividends alone is not the equivalent of a golden goose laying golden eggs, and selling stock is killing the golden goose.”
He claims there is no magic in dividends. They are not inherently better than other types of investments that need to be sold to generate the desired income. This is an argument shared by many financial experts, including Warren Buffett and Rob Berger.Watch the burger video Why Dividends Doesn’t Increase Assets.
Disadvantages of Dividends as Retirement Income
Note: You have options as to what to do with the dividends paid. Basically, you can reinvest your money or cash it out and use the dividends as income. The pros and cons below refer specifically to using dividends as income. (For more information on reinvesting, see the discussion “Drip or Draw, What to Do with Stock Dividends After Retirement.”)
Dividends aren’t magic, money comes from somewhere
See, nothing in life is free. Dividends come at a cost. The original Facebook poster wrote, “If a stock were worth $100 per share and you paid a $3 dividend, the price would drop to $97. No magic money-making machine or golden goose. Waited for my daughter to fall asleep.”
Nothing in life is free, including dividends. Dividends reduce investment value. For more information, please see this article. free dividend fallacyfrom the Chicago Booth Review, or read below. Dividend cuttingPapers from researcher Graduated from Carroll School of Management, Boston University.
Dividend investments may offer more limited upside
Dividend focused investments may prioritize income generation over capital growth. Companies that pay higher dividends may have less capital to allocate to growth opportunities, limiting their share price appreciation. A focus on income may reduce the growth potential of the overall portfolio.
A dividend is a choice a company makes to pay its shareholders rather than investing money in growing the business.
Income reliance on dividends can be risky
Relying heavily on dividend income for retirement benefits may expose retirees to the risk of dividend reductions or elimination. Companies may reduce or eliminate dividends due to various factors such as economic downturns, changes in business conditions, and management decisions. This can have a significant impact on your retirement income and will require adjustments to meet your financial needs.
A balanced asset allocation to achieve your overall financial goals is critical to successful investment.
Dividend income is not guaranteed
Companies that have paid dividends are under no obligation to continue paying dividends in the future. Whether and how much a company pays a dividend is determined by the company’s board of directors and is influenced by a variety of factors including the company’s financial performance, cash flow, profitability, growth opportunities, debt levels and management decisions. will be .
There is a strong argument that “necessary” retirement benefits should be guaranteed.
Sector concentration risk
Dividend-producing investments are often concentrated in specific sectors such as utilities, consumer staples and real estate. Overconcentration of retirement portfolios in one sector, he said, could increase vulnerability to sector-specific risks and recessions affecting that sector. Diversification across sectors is important to effectively manage risk.
interest rate sensitivity
Dividend stocks can be sensitive to changes in interest rates. Rising interest rates can make bond investments more attractive than high-dividend stocks, which can affect stock prices. Retirees should be aware of this interest rate risk and consider the potential impact on the value of their dividend-focused investments.
market volatility
Dividend stocks are typically more stable than average, but are still subject to market fluctuations. Retirees who rely on dividend income should prepare for short-term fluctuations in the value of their investments. This requires careful portfolio management that considers diversification and maintains an appropriate asset allocation that balances risk and return needs.
Advantages of using retirement benefits as dividends
Choice and Flexibility
Retirees may choose to reinvest their dividends to purchase additional shares through the Dividend Reinvestment Plan (DRIP). Reinvesting your dividends can increase your investment returns over time and increase the return you earn from your investments.
Joe wrote in favor of the dividend: “As a company owner, you receive a portion of the income and you can decide what to do with it. or I need money, so I spend it. ”
regular source of income
Dividend-paying investments, such as dividend stocks and dividend-focused funds, provide retirees with a stable and predictable income stream. Regular dividend payments can supplement other retirement income, such as pensions and social security, to help cover your living expenses.
In some cases, the regular income and not having to worry about selling your investments outweighs the loss from capital appreciation.
Note: Dividends are somewhat predictable, but not guaranteed.
Dividend growth potential
Some companies increase their dividends over time. By investing in dividend growth stocks, retirees can benefit from increased income, protect themselves against inflation, and maintain purchasing power in retirement.
Portfolio stability
Dividend-producing investments are often associated with stable, mature companies. These companies tend to have a track record of stable dividend payments and may be less volatile than growth stocks. This stability provides a sense of security and helps reduce the impact of market volatility on your retirement income.
Tax saving effect
Dividend income may be taxed at a lower rate compared to other forms of income such as interest and capital gains. Retirees receive tax incentives for dividends, which can increase after-tax income.
Note: Dividend tax benefits generally apply only to taxable accounts. Therefore, funds invested from Roth accounts do not have the same tax benefits.
Easier psychologically than selling stocks
You think investing is a reasonable undertaking. However, our emotions play a big role in how we perceive different types of investments. And as long as you are aware of the impact your emotions have on your money, there is nothing wrong with using them.
Some people simply feel more comfortable cashing in their dividends than selling their investments. As Joe (not the original poster) pointed out, “It’s certainly psychologically easier to spend dividends than sell stocks if you’re living off a portfolio.”
Mark enjoys the psychological comfort that dividends provide. He writes: “I retired into the bear market in the fall of 2021 and have been living off dividends ever since. Investing in a wide range of CEFs, BDCs, REITs and individual dividend stocks. It’s going down, but I’ve been able to increase my dividend “income” pretty well, and when the next bull market started, I didn’t sell my golden goose, so I still have all my egg “shares.” increase. As usual, when the market recovers, so does my portfolio, and I’ve been thriving on dividends and distributions all the while. I can’t imagine making a living selling stocks in a bear market while locking in losses along the way. It may not apply to everyone, but it worked for me! ”
There is nothing wrong or right about dividends. Whether to use it depends on your goals, tax situation, overall time frame, etc.
Dividend-producing investments are one of nearly limitless options for your retirement wealth. Like any investment, opportunities should be evaluated in terms of risk, return, term, investment objective, target asset allocation, tax, etc.
There are a few considerations to add to the dividend-versus-income discussion.
Investing can be complicated
Corey writes: How qualifying vs. non-qualifying dividends, monthly vs. quarterly dividends, when automatically reinvested vs. timed reinvestment, or when used as income. All of these situations should be considered before deciding which option is best for you or your situation. ”
There are actually many factors to consider when evaluating an investment.
Emphasis on total return
Total return refers to the overall financial gain or loss an investor experiences from an investment over a specified period of time, taking into account both capital appreciation (or depreciation) and the return generated by the investment. It provides a comprehensive measure of an investment’s performance, including dividends, interest, and changes in the investment’s market value.
As one of the resident geniuses of the Facebook group, Glenn, pointed out: “I tend to agree that investing with a dividend objective as a primary strategy is not as good as investing with a ‘total return’ objective (where the dividend is part of the total). ”
give every money a job
Glen continues, “I like the maxim that every ‘dollar’ should have a ‘job’.”
As part of developing your asset allocation strategy, you should assess your goals. If you are lucky enough to have enough assets, you may want to prioritize guaranteed income over overall portfolio growth. Or maybe maximizing inheritance is the most important thing. Know your goals and spend money to reach them.
Depending on your goals, you’ll want to put your money into different jobs. Some of your money goes into dividend-producing investments, some goes into risky stocks, and most goes into index funds, CDs, and bonds.
Author Joe writes, “Each person should be educated to plan and apply an investment strategy that meets their requirements and allows them to sleep well at night.”
As with any investment, keep a plan and seek professional advice if necessary.
A comprehensive financial plan, like the one you can maintain with NewRetirement Planner, is essential to making informed decisions about how you invest your money and how it impacts your financial security.
Note: We are working to improve our asset allocation and dividend tracking capabilities.
You can also work with your financial advisor to determine your target asset allocation, or mix of investments that suits your goals. NewRetirement Advisors allows you to work with a CERTIFIED FINANCIAL PLANNER™ expert. Get a personalized asset allocation strategy from our flat rate planner. Book your free discovery session.
