5 Reasons to Invest in Dividend Stocks for Retirement

Dividends may not be the only path for an individual investor's success, but if there's a better one, I have yet to find it. -- Josh Peters 

As Mr. Peters suggested, there can certainly be other routes to riches, but there's a strong case to be made for getting there via dividend-paying stocks. Here are five reasons to consider keeping some -- or much -- of your portfolio in dividend payers.

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1. Solid, dependable companies

If you stick with dividend payers, you're more likely to be investing in solid, dependable companies. That's because a company isn't likely to initiate a regular dividend unless its management is fairly certain that it will be able to pay it regularly. Companies facing challenging times may indeed reduce, suspend, or eliminate dividend payouts, but they will try hard to avoid that, as it looks bad and displeases investors.

Thus, it's generally more mature companies that offer dividends -- companies that have excess cash to offer shareholders. Younger, more rapidly growing businesses will tend to need every dollar they earn to reinvest for further growth.

2. Dependable income

As suggested above, companies that pay dividends tend to do so very regularly -- the most common frequency is quarterly. Some companies pay dividends every month, and some pay every six months or less often.

Being an investor in the stock market means expecting volatility and seeing your holdings' prices fluctuate. Sometimes they will even stall or sink for a while, and some simply crash. But most or all of your dividend-paying stocks will still keep paying their dividends, no matter whether there's a recession afoot or whether the market is booming.

Let's say that you have a $300,000 portfolio with an overall dividend yield of 4%. That should kick out about $12,000 in cash to you every year, amounting to about $1,000 per month. If you're still working, earning, and investing, that's an extra $12,000 per year that you may be able to plow into your retirement portfolio. If you're already retired, that's $12,000 to help support you.

3. Increasing income

Better still, dividends tend to increase over time. Many companies increase their payouts every year. Those that have done so for at least 25 consecutive years are referred to as "Dividend Aristocrats," and you can bet that a company on that rather small list will want to stay there by continuing to hike its dividend.

Here are a few familiar names with their recent dividend yields and their dividend growth rates:

Source: Yahoo! Finance and author calculations.

Image source: Getty Images.

4. Dividends may keep up with or exceed inflation

If you're not worrying about the effect of inflation on your retirement nest egg, you should. Inflation has averaged close to 3% annually over long periods, though it can sometimes be much higher or lower than that. (In December of 2021, for example, prices rose about 7% over year-earlier levels.) A 3% annual inflation rate is enough to shrink the buying power of your retirement account by around 50% over 25 years.

Fortunately, dividend income will often keep up with inflation -- or even exceed it. Take a look at the table above, and you'll see plenty of dividend growth rates well exceeding 3%, and some exceeding 7%, too. If you're counting on dividend income to help support you in retirement, it's nice to know its buying power won't be shrinking.

5. Less drawing-down of your principal

Finally, there's this reason to consider dividend-paying stocks for your portfolio: They can keep you from drawing down your nest egg or can at least slow the draw-down. If you retire with a portfolio valued at $500,000, for example, you might plan to take around, say, $30,000 from it in your first year or so to augment your Social Security benefits, increasing your withdrawals over time. But your nest egg may not last throughout your entire retirement that way. You'd be selling off shares each year, and it would keep shrinking.

If some or all of your portfolio is invested in dividend payers, though, perhaps enough to generate around $15,000 per year, that will mean you'll need to shave off fewer shares each year.

Dividend-paying stocks make a lot of sense for lots of us, so be sure to give them a lot of consideration. Chasing high-flying stocks is certainly more exciting than grabbing onto solid, established dividend payers, but dividends may help you sleep better at night. It's not an either-or situation -- you may include growth stocks as well as dividend payers in your portfolio, and some growth stocks pay dividends also.