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7 Reasons to Invest in Dividend-Paying Stocks for Retirement

By Catherine Brock - Apr 29, 2021 at 9:31AM

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If you only have time for one reason, read No. 5 first.

Retirement would be a lot easier if you didn't have to give up your paycheck to stop working. Therein lies the beauty of investing in dividend-paying stocks for retirement: Your dividend income isn't dependent on you showing up at the office every day.

That's just one justification for adding a dividend strategy to your retirement savings plan. Read on for seven more reasons dividend-paying stocks could be the MVPs of your retirement portfolio.

1. Dividend payers are comforting in downturns

In a market downturn, quality dividend payers will be the bright spots of your portfolio. They may take a temporary hit on the share price, but they're still producing cash. When every other position you own is losing money day by day, you'll appreciate those dividend payments even more than usual.

Woman holding handful of bills to represent investing in dividend-paying stocks for retirement.

Image source: Getty Images.

2. Dividend yields beat most Treasury maturities

A premium dividend-paying stock might yield 1% to 3% annually. Consumer brands company Colgate-Palmolive (CL -1.25%) yields 2.28%, for example; fast food chain McDonald's  (MCD -1.70%) yields 2.20%, and pharmaceutical company Johnson & Johnson (JNJ -2.84%) yields 2.49%.

These yields are comparable to the current yields on 20-year or 30-year Treasury bonds. Shorter-maturity Treasury yields, on the other hand, are less competitive. Seven- to 10-year yields are between 1% and 1.8%, and maturities of five years or less are below 1%.

3. Dividend payers make sense in your retirement account

You can amass a larger position in dividend-paying stocks by reinvesting those dividend payments in the years before you retire. That's far easier to do in a retirement account where your earnings are tax-deferred.

4. Dividends help you manage inflation

Some dividend-paying companies are known for increasing their shareholder payments every year. Those that push through annual dividend increases for 25 or more years consecutively earn the exclusive label of Dividend Aristocrat. Once a company earns Aristocrat status, the leadership team is highly motivated to keep it.

Colgate-Palmolive has increased its dividend for 59 years straight by an average of 3.25% annually. McDonald's shareholders have enjoyed dividend increases averaging 9.58% per year for 45 consecutive years. And Johnson & Johnson has raised its dividend by 6.23% on average for 59 consecutive years.

That rising dividend income helps you address inflationary increases in living expenses in retirement.

5. Well-run companies pay dividends consistently

Since we're talking about reliable dividend payers, take a minute to consider the achievement of paying rising shareholder dividends consecutively for 25 years or more. That takes a disciplined and focused leadership team as well as a business model that consistently produces a lot of cash. Those same qualities make premium dividend stocks attractive as long-term anchors of your portfolio.

6. Dividend payers also appreciate

Unlike bonds, your dividend-paying stocks also appreciate while they're producing cash. For instance, going back to the three companies discussed above, Colgate-Palmolive, McDonald's, and Johnson & Johnson have all shown average annual share-price gains of 9% or more over the last 10 years. 

7. Dividend payers produce cash

Dividend payers produce cash, and that can be crucial to ensuring your long-term solvency in retirement. To the extent you can use your dividend payments to fund retirement distributions, you'll be less reliant on liquidations. Fewer, less-frequent liquidations keep your earnings power intact and lower your risk of selling at the wrong time.

Stability and reliability

There's no guarantee any company will continue paying its dividend, just as there's no guarantee any stock will appreciate over the long term. To avoid those risks, you need to stay out of the stock market entirely, which might guarantee you'll fall short of your retirement savings goals.

Dividend payers aren't risk-free, but they are often more stable and reliable than their peers that don't pay dividends. And those are just the qualities you want from your retirement portfolio MVPs.


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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$176.94 (-2.84%) $-5.18
McDonald's Corporation Stock Quote
McDonald's Corporation
$242.83 (-1.70%) $-4.20
Colgate-Palmolive Company Stock Quote
Colgate-Palmolive Company
$78.88 (-1.25%) $-1.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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