Dividend income is an important part of the best retirement plans, but some groundwork is required to get it right. Social Security benefits are great, but they generally aren't high enough (and were never designed) to achieve the lifestyle that many people aspire to enjoy all on their own.
The amount of dividends that you'll get in retirement is based on the amount of assets you can build up to the point of retirement, as well as how you invest those assets in your golden years. If you want to do this efficiently and responsibly, there are some important rules to try to follow that will get you there.
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1. Save enough to build wealth
It's a stretch to call this an "easy" step, but it's a straightforward one. You won't get retirement dividends without capital to invest, and you can't accumulate capital to invest without saving some income.
Households should strive to save at least 15% of earned income each year. There will be some years when that's not possible, so it's important to save even more if you can. With that goal in mind, there are some successful strategies to improve savings rates.
Open up a bank account that's separate from your checking account to discourage spending. This helps you track progress and organize your cash. Save a set amount of each paycheck into this account. If you can do this with direct deposit, even better. Your account balance will steadily grow over time.
Also, take advantage of the benefits of different retirement accounts. Take advantage of employer 401(k) matches to increase your total savings. If you're in a relatively high tax bracket during your peak earning years, consider a traditional IRA to increase tax deductions. Roth IRAs are also great options for many people, particularly younger investors. Contributions are made after taxes have already been subtracted from your income, but Roths grow and are distributed in retirement tax-free.
For a household earning $100,000 per year, a 15% savings rate equates to $1,250 each month. Over 30 years, that adds up to $450,000.
2. Invest for growth
The amount of dividend income that your investment portfolio can generate is based on the value of your account. The more capital invested, the higher the dividends. That's why it's so important to responsibly maximize your investment account values at the time of retirement. That will dictate the amount of cash flow available after you stop working. It's an absolute necessity to make sure you invest for growth over the course of your working life.
Even modest growth can be transformative over long time frames. Consider the hypothetical household that saves $1,250 per month. If those savings were invested to achieve a 5% net rate of return each year, that account would swell to around $1 million over 30 years. That rate of return is well below the yearly average for major stock market indexes such as the S&P 500, so it's a reasonable assumption.
Retirement investment strategies should vary with age. Younger savers have time to ride out market cycles, so volatility isn't as big a concern. These accounts should be allocated for maximum growth. As you get closer to retirement, then you won't have as much time to recover from market crashes and corrections. That means you need a more conservative allocation to bring stability and limit downside risk.
Always make sure that your investment allocation is aligned with your risk tolerance and time horizon. You shouldn't chase returns by taking on too much risk, but you should ensure that your portfolio compensates you appropriately for whatever volatility you endure.
3. Maximize dividend income responsibly
Once you've reached retirement, it's all about getting the most income from your investment portfolio without exposing yourself to catastrophic risk. The best dividend portfolio for retirees holds high-yield stocks, has some level of diversification, and avoids dud investments that could drastically slash dividends.
Stock picking can be a valid strategy for long-term growth, but it's less effective when stability is the priority. That's not to say that index investing is the best way to go, but any individual stocks should be part of a diversified portfolio in a retirement income portfolio. You don't want your whole plan to fall apart if a company fails or drastically downsizes 10 years from now due to unforeseen developments.
The best stocks for long-term dividend income have stable profits and high, sustainable dividends. Look for companies with economic moats, steady long-term revenue growth, stable profit margins, and relatively low payout ratios. Dividend Aristocrats are popular stocks that consistently raise dividends over time. These are great for stability, but many of them have fairly low yields right now. Master limited partnerships (MLPs) and real estate investment trusts (REITs) are also popular income investments that can be purchased just like stocks.
Dividend exchange-traded funds (ETFs) are another great tool for retirees. These provide instant diversification, and you can even pick ETFs that only buy high-yield stocks with good financial health. The Vanguard High Dividend Yield ETF, the Schwab U.S. Dividend Equity ETF, and the iShares International Select Dividend ETF are all popular, reputable funds that can deliver the investment income you need.
A great dividend yield for a diversified, low-risk portfolio in today's market is just under 3%. Take that household that saves $1,250 each month and earns a 5% rate of return on those savings for 30 years, which grows to a $1 million investment portfolio in retirement. A 2.7% dividend yield on that $1 million in savings would produce around $2,250 per month.
