Unfortunately for many people, a single source of retirement income won't be enough to sustain their lifestyle; it's going to take a multi-angle approach. Although some of the more obvious options for retirement income may be a 401(k) plan, IRAs, and Social Security, one underrated source of income is dividend payouts.
Dividends are typically paid out every quarter, and they're a way to reward investors for investing in and holding onto a stock that may not have the hypergrowth potential that often comes with younger, smaller companies. With these three easy steps, you can receive thousands in monthly retirement dividends.
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1. Invest in ETFs that focus on dividend-paying companies
To receive decent dividend income in retirement, you must first accumulate a good stake in a dividend-paying stock. Doing so in an individual company can be tough and may go against your investing goals or cause you to not be as diversified as you should. That's where dividend ETFs come into the picture.
Dividend ETFs can give you the benefit of both holding dividend-focused companies and maintaining diversification, as many consist of hundreds of companies spanning all sectors. It also helps spread out some of the risks involved with dividend stocks, such as a company going through hard times and deciding to suspend its dividend payouts, like Delta Air Lines and Boeing both did in March 2020 during the early stages of the COVID-19 pandemic.
There is no specific dividend yield that's deemed "good" (largely because dividend yield fluctuates with a stock's price), but generally speaking, you should look for dividend ETFs that have at least a 2.5% dividend yield. The higher the merrier, but you want to be careful not to go strictly off a dividend yield because it can be misleading. If a stock pays out $3 in yearly dividends and its stock price is $100, the yield is 3%. If the stock price drops to $50, the yield becomes 6% and seemingly much more lucrative -- except it doesn't explain the why behind the high yield.
2. Reinvest your dividends until you reach retirement
If you're investing in a dividend-paying stock, you can either receive your dividends as cash payouts or enroll in your broker's dividend reinvestment program (DRIP) if it offers one. A DRIP takes any dividends you receive and automatically reinvests them in the stock or fund that paid them. If you have the option for a DRIP, you should strongly consider it; it can add to the effects of compound interest and work wonders.
Let's imagine you invested $1,000 monthly into a fund with a fixed 3% dividend yield that returned, on average, 10% annually over 25 years. Here's how the account totals would differ if you took the cash dividends versus reinvesting them:
| Reinvest Dividends | Account Total After 25 Years |
|---|---|
| No | $1.18 million |
| Yes | $1.86 million |
Data source: Author calculations
Ideally, you won't need the dividend payouts in cash until you retire, so you can let them grow and compound until then. Even if you don't reinvest dividends -- although you should if you have the option -- $1.18 million accumulated in a fund paying out a 3% yield will give you $35,400 in yearly dividends. With reinvested dividends, $1.86 million with a 3% yield will pay out $55,800 in annual dividends. That's $2,950 and $4,650 in monthly dividends, respectively.
3. It's going to take consistency
You don't need millions of dollars in a stock for good dividend income in retirement, but you will need a good amount if you want thousands in monthly income. A number like $1 million may seem like a lot on paper, but with consistency and dollar-cost averaging, it's very doable if you give yourself time. With just $500 invested monthly and 10% average annual returns (including the dividend yield), you can accumulate over $986,000 in 30 years. With just a 2.5% yield, that's more than $2,000 in monthly dividends.
Since you have a set investing schedule when you use dollar-cost averaging, it helps to keep you consistent. You don't want your investing to be sporadic or find yourself trying to time the market (especially during a bear market when prices are dropping). The key is just being consistent and letting time and compound interest do a lot of the heavy lifting for you.
