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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:

Start investing today -- just $7 per trade with Scottrade. Or find the broker that's right for you.

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Fool contributor Dan Caplinger loves to see those checks rolling in every quarter. He doesn't own shares of the companies mentioned in this article. Heinz and Kimberly-Clark are both Motley Fool Income Investor picks. The Fool's disclosure policy won't quit on you.


Read/Post Comments (14) | Recommend This Article (104)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 31, 2009, at 9:47 PM, ozzfan1317 wrote:

    Merck is trash, Kraft is a good company but you will likely only sightly outperform with it.

  • Report this Comment On August 01, 2009, at 2:29 PM, teepsheem wrote:

    "All told, that comes to more than $38,000 in annual dividend income." Huh????? That means that the investor would have to have $700,000 invested!

    WHAT IS THE THE WRITER'S DEFINITION OF "RICH?"

  • Report this Comment On August 02, 2009, at 11:10 AM, Classof1964 wrote:

    It is important to have a good grasp of the facts on your individual stocks and the overall market. I bought 100 shares of Merck in October, 1993 for $3,11.18, including commission. Over the 15.5 years I owned MRK, it split once, 2 for 1, and spun off Medco for a small deduction in my basis. Through the end of 2008 I collected $2,761 in dividends. The result is that I had a return over the period (not counting 2009 dividends and assuming I sold MRK for $30 a share) of 7.1%. My basis is now under $15.00 per share. The only time MRK sold for $140 or more a share was after the split at the top of the bubble at the end of 2000.

    The conclusion can draw from the article is that MRK is a reliable and steady dividend payer at today's prices paying over 5%. What the writer does not say is that higher returns, and the high stock returns cited in long term studies, are only received IF one reinvests the dividends in the stock instead of collecting them as cash. I did not reinvest my dividends, and the article is talking about income, not long term return.

    Secondly, given the volatility of the stock market particularly in the last decade, one cannot base expected returns on comparing bubble prices with bear prices. And every bull (or bubble) market has been followed by a long term bear market. What the writer and Warren Buffet are telling folks correctly is that if you want high income or high capital gains, the time to invest in good reliable firms is during the bear phase when dividend yields are up and P/Es or other measures of value show bargains on good reliable companies.

  • Report this Comment On August 07, 2009, at 2:03 PM, plange01 wrote:

    my best pick this year is up over 900% and is no where near its top. take a look at (car) i left a $50,000 job with the company in june that i had for 11 months and have made $950,000 on its stock in 10 months!thats more than its ceo gets paid!!you dont make money by working!

  • Report this Comment On August 08, 2009, at 12:21 AM, storming01 wrote:

    my stocks picks are for dividens and up turns

    agnc bought at 23.73 has ,33 cent per quarter

    asr bought at 44.68 has 4.71 dividen

    cnsl bought at 13.00 has 1.55 dividen

    dep bought at 18.75 has 1.74 dividen

    all above stocks paying average 15%

  • Report this Comment On August 10, 2009, at 6:11 PM, hawk78 wrote:

    AZN is currently paying $.59 on a semi-annual basis. how does that get close to 6.5% with trading around $45 for the last month?

  • Report this Comment On August 13, 2009, at 11:22 PM, ftl7 wrote:

    Imagine?? You have $700,000 to invest in stocks. What kind of an idiot are you??? You call yourself part of the TMF? How did you possibly get hired to advise people, simple people, who do not have $700,000 to invest. Is this where TMF is going??? To me, with your pathetic statements you are just a FOOL and have no business advising others what to do with their money!!!!!!!!

  • Report this Comment On March 17, 2012, at 11:36 PM, waynesimpson wrote:

    Iam a recent fool convert with very little knowledge in serious investing.Is there a way to check if my existing share portfolio is up to scratch?

  • Report this Comment On February 17, 2013, at 6:24 PM, bankstrader wrote:

    ummmm........this is 2013? update??????

  • Report this Comment On April 23, 2013, at 11:25 AM, dcc91411 wrote:

    Dividend Yield as of April 23, 2013

    T - 4.68%

    HNZ - 2.80%

    KMB - 3.10%

    KFT - now KRFT - 4.10%

    MRK - 3.56%

    AZN - 7.35%

    RAI - 5.29%

  • Report this Comment On June 09, 2013, at 1:41 PM, bookiz wrote:

    what do you guys think of penny stocks? you think it's a good way to start investing. www.pennystockipedia.com stated that trading penny stocks can be good... what's ur take on that?

  • Report this Comment On July 24, 2013, at 6:20 AM, claryfray wrote:

    Today's hot stock market is both inviting and intimidating to new investors.

  • Report this Comment On August 15, 2013, at 10:03 PM, Heidikitty wrote:

    The man in charge of investments at my bank suggested I buy more Win as it paid good dividends but I do not get any good info about it on the internet and I am concerned. should I sell it as I have KMP and SDRL and I could buy more of the same. Please advise as I am 73 years old. Thank You

  • Report this Comment On January 01, 2014, at 1:09 PM, Rr2008 wrote:

    Has MF or Dan Caplinger updated the article and dividend stock recommendation to reflect a 2013 or 2014 selection?

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

7/24/2014 4:01 PM
AZN $74.52 Down -0.42 -0.56%
AstraZeneca plc (A… CAPS Rating: ***
HNZ.DL $72.49 Down +0.00 +0.00%
H.J. Heinz Company CAPS Rating: ****
KMB $109.49 Down -0.01 -0.01%
Kimberly-Clark CAPS Rating: ****
KRFT $58.33 Up +0.03 +0.05%
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