Want to learn about our optimal strategies for dividend growth investing and retirement success? Then read on.

living on dividends in retirement

Dividend growth investing and retirement go hand in hand—but for maximum returns, you need to know how to spot the best stocks, and how to fit them into a portfolio

Dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio to cut risk and improve the stability of your investment results.

Dividends can then play a very important role in retirement, which is why it’s important to consider dividend growth investing and retirement together.


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Dividend growth investing and retirement: Focus on quality to cut risk in your portfolio

As with conservative dividend-paying stocks, dividend growth stocks offer investors an added measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, at the same time, it’s important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). (We say more on that below.)

As well, you should always remember that while growth stocks can hold the potential for greater gains than conservative selections, they typically expose you to a higher level of risk—even if they are dividend-paying stocks.

That’s why we look beyond dividend yield when making investment recommendations—we look for dividend stocks that have an established business and at least some history of building revenue and cash flow.

Take a “buy, hold and watch carefully” for dividend growth investing and retirement planning

Some people think that buy-and-hold means buy and forget about it. It really should be “buy, hold and watch carefully”—even with a dividend-paying stock with a pedigree. But when you build your retirement portfolio out of stocks that pay dividends, you have fewer unpleasant surprises and a better, more stable source of retirement income, from steady dividends plus capital gains as well.

We’ve always placed a high value on a strong record of paying dividends, mainly because it provides that pedigree of sorts for the stocks we recommend. It takes a lot of success and high-quality management for a company to have the cash and the determination to declare and pay a dividend every year for five or 10 years or more. It’s not something you can create on the spur of the moment.

Many investors have come to share our high regard for dividends, especially as a source of retirement income. However, some take this reliance on dividend stocks to extremes. They put too much faith in a history of dividend payments. They think of a stock with a good dividend history as the next best thing to a government bond.

But it’s nothing of the kind. It’s a good sign, but not the only sign you need to look for. It takes continuing effort to succeed as an investor—and you need to “buy and watch carefully.”

Dividend growth investing and retirement: Retirees should assume conservative yield estimates to account for unforeseen setbacks

As for the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume there will be increases in the value of the bonds.

Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your retirement planning—5% a year, say—to allow for unforeseeable problems and setbacks.

Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.

One thing we encourage all Successful Investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.

Use our three-part Successful Investor approach to select top dividend-paying stocks for a sound retirement portfolio

  • Invest mainly in well-established, mostly dividend-paying companies.
  • Spread your money out across most if not all of the five economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities). This cuts your risk of getting too heavily invested in an industry or sector that is headed for a slump. It also increases your chances of investing in a super stock with returns that are two to five times or more higher than the market averages.
  • Downplay or avoid stocks that are in the broker/media limelight. This limelight inflates investor expectations. When stocks fail to live up to those inflated expectations, downturns can be brutal. 

Dividend growth investing and retirement go well together. What other strategies do you use for retirement planning?

How much do dividend growth stocks add to the value of your portfolio?

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