All dividend-paying companies are not created equal. While there are some companies you can say have a reliable dividend, there are others who get the celebrated title of "Dividend King."
If you're looking for investments that can provide reliable income and have stood the test of time, look no further. Here are three reasons to consider Dividend Kings for your retirement account.
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1. They have stood the test of time
History has shown us in the stock market that uncertainty is the only thing that's certain; if you invest for long enough, you're bound to run into a market downturn. Dividend Kings got their title because they've managed to increase their yearly dividend for at least 50 consecutive years. This means in the past 50 years, these companies have withstood huge market downturns, multiple recessions, and other less-than-ideal broader economic conditions.
When you're investing in a Dividend King, you can be all but certain that the company can hold strong through tough times while simultaneously managing to keep its dividends going -- which isn't the case for even some of the most seasoned companies. Take Walt Disney and Delta Air Lines, for example, both of which suspended their dividends amid the COVID-19 pandemic.
Knowing your investments will continue paying dividends will surely ease any anxiousness you may have as the stock price fluctuates and drops.
2. They can provide vital income in retirement
With enough time and consistency, a good dividend portfolio can provide substantial income in retirement. If you're able to save and invest in a fund that returns 8% annually (just below the historical annual return of the S&P 500), here's how much you would have roughly accumulated in 30 years at different monthly contribution amounts:
| Monthly Contributions | Account Value |
|---|---|
| $1,000 | $1.35 million |
| $1,250 | $1.69 million |
| $1,500 | $2.03 million |
Data source: author calculations.
If those amounts were invested into a fund with a 2.5% dividend yield, here's how much they would pay out annually:
| Monthly Contributions | Account Value | Annual Dividend Payouts |
|---|---|---|
| $1,000 | $1.35 million | $33,750 |
| $1,250 | $1.69 million | $42,250 |
| $1,500 | $2.03 million | $50,750 |
Data source: author calculations.
With those annual dividend payouts, you're essentially receiving monthly payouts of over $2,800, $3,500, and $4,200, respectively. Even if those totals aren't enough to maintain your current lifestyle in retirement, they're a worthwhile supplement to other sources of retirement income, such as a 401(k) or Social Security.
3. You won't have to worry about taxes if they're in a Roth IRA
Generally, how dividend payouts are taxed depends on whether it's a qualified dividend or an ordinary dividend. To be deemed a qualified dividend, it must be from one of the following:
- A U.S. company (or company in U.S. possession).
- A foreign company that is eligible for benefits under a U.S. tax treaty.
- A foreign company that can be traded on a major U.S. stock market.
Investors must also have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Qualified dividends are taxed favorably at your capital gains tax rate, while ordinary dividends are taxed at your regular income tax rate.
Luckily, if you purchase these investments in a Roth IRA, you won't have to worry about the taxes on dividend payouts. Since you contribute after-tax money into a Roth IRA, you get to receive your withdrawals tax free in retirement. Having your money grow and compound tax free can save you tens of thousands in taxes while you're in retirement.
