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Pave the Road to Retirement With Dividends

The little things matter.

No, I'm not talking about leaving notes around the house for your spouse or remembering to put the toilet seat down. I'm talking about retirement planning. It's such a long-term process, whether you're decades away from the big day or you've just retired but plan on living a few more decades until that Really Big Day.

Let simple math take the wheel
After decades of compounding interest, the little things snowball into big things. Really big things.

For example, let's say you had $1,000 to invest, a 53-year time horizon, and a choice between two stocks. You choose one stock and check back a half-century later. One investment earned a compound average 14.42% a year, the other 13.83% a year.

Not too much of a difference, you might think, but here's where "the little things" matter. Even though the difference in these stocks' performance was just 59 basis points -- just a bit more than one-half a percent -- $1,000 invested in one stock turned into $961,000, yet $1,000 invested in the other would have grown into $1,260,000. That 59-basis-point annual difference resulted in one portfolio being almost a third larger than the other.

As you might have guessed, we didn't pick those numbers out of a hat. They come to us from The Future for Investors, the most recent book from Wharton Business School professor Jeremy Siegel. The two stocks, ExxonMobil (NYSE: XOM  ) at 14.42% and IBM (NYSE: IBM  ) at 13.83%, have been two of the market's best-performing stocks of the past 50 years.

The reason they've performed so well? Dividends -- those "little things" that many investors consider an afterthought, if at all -- really do matter. The reason Exxon beat IBM over that period was a higher dividend yield, even though its annual average share-price appreciation was actually lower.

Consider these other dividend-paying stalwarts and how they've stacked up against the S&P 500 over the past 20 years:

Current
Dividend Yield

20-Year
Annualized Return

Value of $1,000
in 20 years

Rohm & Has (NYSE: ROH  )

2.9%

13.1%

$11,729

Johnson & Johnson (NYSE: JNJ  )

2.4%

16.3%

$20,492

Coca-Cola (NYSE: KO  )

2.8%

13.4%

$12,367

3M (NYSE: MMM  )

2.7%

11.6%

$8,890

Procter & Gamble (NYSE: PG  )

2.2%

15.7%

$18,479

S&P 500 Average

1.8%

8.7%

$5,303

*Data provided courtesy of Yahoo! Finance.

The little things mean a lot
That's why I've called dividend payers the right stocks for retirement. Reinvest in your working years, take the cash in your golden years. Lower tax rate than capital gains and no commission.

Ah, if it were only that simple
The little things make a big difference. Of course, that's true for all parts of retirement planning, and that's why I help subscribers figure out the entire picture in the pages of Rule Your Retirement. Each month, we go over withdrawal rates, taxes, asset allocation, and, of course, specific investment vehicles for investors of all ages to consider. You can check out the entire service -- including today's brand-new issue, which releases at 4 p.m. ET -- with a 30-day free trial. Click here to learn more.

Robert Brokamp, editor of Motley Fool Rule Your Retirement, does not own shares of any company mentioned in this article. Coca-Cola and 3M are Inside Value picks. Johnson & Johnson is an Income Investor selection. The Motley Fool has a disclosure policy.


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10/22/2014 4:01 PM
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