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5 Reasons to Invest in Dividend-Paying Stocks for Retirement

By Selena Maranjian – Sep 29, 2021 at 8:20AM

Key Points

  • Dividends can deliver regular income without your having to sell any stocks.
  • Dividend income can keep up with or exceed inflation.
  • Dividend payers' stock prices can grow, too.

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It's hard to beat dividends for building wealth and providing reliable income.

John D. Rockefeller said, "Do you know the only thing that gives me pleasure? It's to see my dividends coming in." 

Rockefeller knew a thing or two about wealth and getting rich. According to Harvard Business School professor Tom Nicholas and Stanford political science professor Vasiliki Fouka, "Rockefeller's estimated $1.4 billion net worth in 1937 was equivalent to 1.5% of U.S. GDP. According to this metric he was (and still is) the richest individual in American business and economic history." Clearly, dividend income was important to him. Here are some reasons they should be important to you, too.

A happy bespectacled person is holding a wad of cash.

Image source: Getty Images.

1. You get income without selling stocks

One way to get income out of the stocks in your portfolio is to routinely sell some of them. With dividend-paying stocks, though, you can get income without selling any shares! Much depends on the size of your portfolio and the overall average dividend yield it sports: If you have a portfolio worth $500,000 and an overall dividend yield of just 2.5%, you can expect $12,500 in annual income -- just over $1,000 per month.

2. Dividends tend to grow over time

Better still, dividends from healthy and growing companies tend to be increased over time -- often annually. Walgreens Boots Alliance (WBA 0.66%), for example, has upped its payout by around 10% annually over the past decade, and that's not such an unusual rate. There are dozens of "Dividend Kings" -- companies that have increased their dividends for at least the last 50 consecutive years. Even more numerous are Dividend Aristocrats, with a 25-year increase record.

3. Dividends can help you beat inflation

Many people underestimate the degree to which inflation can screw up their retirement. The long-term average annual rate of inflation is around 3%, and that alone can cut the purchasing power of your savings by half or more over 25 years. If you're on a truly fixed income, for example, collecting $50,000 annually, in 25 years that $50,000 will be worth only about $25,000.

Dividends to the rescue! If inflation continues to average 3% throughout your financial life, and your dividend payouts increase by an annual average of 3% or more, you should be able to keep up with or even beat inflation. Many, many companies increase their payouts by 5% or more, on average, per year.

A young couple with their child.

Image source: Getty Images.

4. Stocks should grow over time, too

Meanwhile, dividend-paying stocks offer wealth-building not just via dividends, but also via the stocks themselves. Sure, some stocks you invest in, dividend paying or not, may flame out or simply disappoint. But as long as you're sticking mainly with solid companies -- or with broad index funds featuring many dividend payers -- you'll likely see the value of your stock holdings rise over time. With some great growth stocks, the growth rates can be quite steep -- over the last decade alone, for example, shares of Starbucks (SBUX) have grown by an annual average of more than 20%. Costco (COST -0.37%) shares have averaged nearly 20% over the same period, too, while Microsoft (MSFT -0.59%) shares have averaged more than 28%.

5. Dividend payers are often more stable

Finally, dividend-paying stocks tend to be more stable and reliable than nonpayers. Why? Because their managements have grown the companies to a point where they are generating more income than they need to operate and grow, and they see that income as reliable enough that they commit to paying shareholders a dividend annually (typically via quarterly payments). No company wants to cut back, suspend, or eliminate its dividend, as that will upset shareholders, so dividend payouts are taken very seriously and generally expected to continue.

These are just some of the many reasons we should all love dividend-paying stocks. If you don't have a bunch in your portfolio, look into adding some.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Selena Maranjian owns shares of Costco Wholesale, Microsoft, and Starbucks. The Motley Fool owns shares of and recommends Costco Wholesale, Microsoft, and Starbucks. The Motley Fool recommends the following options: short October 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Stock Quote
$240.33 (-0.59%) $-1.43
Walgreens Boots Alliance Stock Quote
Walgreens Boots Alliance
$41.08 (0.66%) $0.27
Starbucks Stock Quote
$98.66 (%)
Costco Wholesale Stock Quote
Costco Wholesale
$528.96 (-0.37%) $-1.96

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

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