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3 Reasons to Invest in Dividend-Paying Stocks for Retirement

By Katie Brockman - Jan 10, 2021 at 9:35AM

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Dividend stocks can be a smart addition to your retirement portfolio.

Today's workers face plenty of challenges when preparing for retirement. Costs are rising, and life expectancy is increasing, meaning you'll need to save more than ever. At the same time, though, many workers don't have access to pensions, and Social Security benefits are at risk of cuts in the relatively near future.

This means you'll need a hefty retirement fund heading into your senior years -- and dividend-paying stocks can help get you there.

Older couple sitting on a boat and smiling

Image source: Getty Images.

1. They can boost your retirement income

Dividend stocks are unique in that they actually pay you to own them. When companies have leftover earnings at the end of the year, they may choose to pay back a portion of that money to shareholders in the form of a dividend.

When you invest in these companies, you can choose to either reinvest your dividend to buy more stock or cash out your payments. It's often wise to reinvest your dividend during the years leading up to retirement, because you'll slowly be buying more shares, and you'll receive more dividends the more shares you own. Then, once you retire, you can start cashing out your payments to boost your income.

2. They can help your savings keep up with inflation

One of the more challenging aspects of preparing for retirement is dealing with inflation. Inflation can significantly reduce your buying power over time, which can pose challenges later in retirement.

If you're investing in dividend stocks, though, those dividend payments can help offset the effects of inflation. Many dividend stocks increase their dividends year after year. The most consistent dividend payers are part of a group of companies called the Dividend Aristocrats. Companies that have earned this notable title have increased their dividends every year for at least 25 consecutive years.

By investing in dividend stocks that reliably increase their dividend payments each year, you can limit the effect inflation has on your savings. That, in turn, can help your money last longer in retirement.

3. They have higher rates of return than standard savings accounts

Around 53% of Americans have at least a portion of their retirement savings stashed in savings accounts, according to a survey from the Certified Financial Planner Board and Morning Consult. While it's usually best to invest your retirement money in the stock market to see as much growth as possible, that can be difficult for many workers to stomach -- especially as they get closer to retirement age.

Investing in dividend stocks is a good compromise between putting your money in a savings account and investing in the stock market. While they're still stocks, which will always carry a certain amount of risk, many dividend stocks pay you more in dividends than you'd receive in interest with a savings account.

For example, most standard bank savings accounts have interest rates of a fraction of a percent per year. Even high-yield savings accounts boast interest rates of just 1% to 2% per year. By comparison, stocks like ExxonMobil and Abbvie -- both Dividend Aristocrats -- have dividend yields of more than 4% as of this writing.

Planning for retirement can be tough, but it helps to have an investing strategy in place. By including a well-diversified array of solid dividend stocks in your portfolio, you can give your income a boost in retirement.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$61.58 (1.13%) $0.69
AbbVie Inc. Stock Quote
AbbVie Inc.
ABBV
$121.35 (2.10%) $2.50

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