When you think about the stocks you want to own so you can retire rich, your obvious thought is whichever one will rise the most. Yet if the last two years have taught us anything, it's that in addition to trying to maximize your returns, you also have to think about preserving capital and avoiding risk.
That's just one reason why the best stocks to help you both before and after retirement are those that pay healthy dividends. By demanding that companies pay you in order to invest in their shares, you screen out a lot of troublesome businesses and pick up some of the best stocks you can own.
How dividends get you ready to retire
One of the things those near retirement may want to start doing is to figure out where they're going to get the cash to pay for their expenses. While you're working, it's easy to leave your investments untouched, relying on your job income to take care of day-to-day bills.
But when your paycheck disappears, you want to be prepared. That's how dividend stocks can help. For instance, say you have $700,000 to allocate to stocks. If you've invested in growth stocks throughout most of your life, then the odds are good that you'll get little or no income from them -- leaving you in a position where you have to liquidate your holdings, even if they've fallen in value lately.
In contrast, if you invest that money into a portfolio of dividend-paying stocks, you can go a lot further toward replacing your job income after you retire. Take a look at this simple example:
|
Stock
|
Current Yield
|
Income on $100,000
|
|
AT&T (NYSE: T )
|
6.3%
|
$6,300
|
|
Heinz (NYSE: HNZ )
|
4.4%
|
$4,400
|
|
Kimberly-Clark (NYSE: KMB )
|
4.1%
|
$4,100
|
|
Kraft Foods (NYSE: KFT )
|
4.1%
|
$4,100
|
|
Merck (NYSE: MRK )
|
5.1%
|
$5,100
|
|
AstraZeneca (NYSE: AZN )
|
6.5%
|
$6,500
|
|
Reynolds American (NYSE: RAI )
|
7.9%
|
$7,900
|
Source: Yahoo! Finance.
All told, that comes to more than $38,000 in annual dividend income. Before you retire, you can use it to build up a cash cushion that you can draw from to pay your future bills. After you retire, it will cover part of your expenses, and may prove sufficient along with Social Security and other income sources to maintain your lifestyle without having to sell any of your long-term stock holdings.
Other great dividend perks
Some investors don't like dividend stocks because they have to pay taxes on the income they generate. Yet especially as you near retirement, you'll probably find that dividend stocks are among the best tax deals you have. Paying a maximum tax rate of 15% on qualified dividends on most widely held stocks is a pretty good deal -- and the current 0% rate on dividends for those in the lowest two tax brackets is the best gift the IRS has ever given to taxpayers.
In comparison, other funding sources carry much larger tax burdens. Tap a traditional IRA or 401(k), and you'll have to pay tax at your full ordinary rate, up to 35% -- and those tax rates could easily go up in the near future. And while you can withdraw from a Roth IRA without paying any tax, you'll forever lose the ability to earn additional tax-free income on that money.
Now, you might think that the benefits of receiving dividends might come only at the cost of giving up returns. Yet historically, dividend stocks have actually performed better than their non-dividend-paying counterparts.
Start getting paid today
So if you're approaching or in retirement, think about how dividend stocks can play a larger role in your investment strategy. With better returns, lower taxes, and the steady income that dividend-paying stocks provide, they definitely could help make your golden years much more comfortable.
For more about retiring rich:
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