Americans believe they need to save $1.3 million for retirement, according to a recent study by Northwestern Mutual. In most cases, people are well short of that goal and it may simply not be attainable.
But one way that you can bolster your financial situation is by investing in dividend stocks. Here's why they should be part of your retirement plan and why they can alleviate some of the financial burdens later on in life.
Dividend stocks keep the money coming in
If you're pulling money out of savings, that money is gone and so is its ability to generate income for your portfolio. If you invest in dividend stocks, however, you can simply withdraw the money that those investments bring in for you every quarter. If your original investment remains unchanged, you'll still continue to generate the same level of income next quarter -- assuming, of course, that there is no change to the dividend payments.
The main drawback is that dividend income will be just a small percentage of your investment. But if by retirement you have hundreds of thousands of dollars saved up, you can spread that across many different dividend stocks or exchange-traded funds. Here's an overview of how much dividend income you could generate annually from dividend stocks based on the size of the investment and the average yield you collect from all of your stocks:
| Annual Dividend Income Based on Yield and Investment Size | |||||
|---|---|---|---|---|---|
| Investment | 1% | 2% | 3% | 4% | 5% |
| $100,000 | $1,000 | $2,000 | $3,000 | $4,000 | $5,000 |
| $200,000 | $2,000 | $4,000 | $6,000 | $8,000 | $10,000 |
| $300,000 | $3,000 | $6,000 | $9,000 | $12,000 | $15,000 |
| $400,000 | $4,000 | $8,000 | $12,000 | $16,000 | $20,000 |
| $500,000 | $5,000 | $10,000 | $15,000 | $20,000 | $25,000 |
| $600,000 | $6,000 | $12,000 | $18,000 | $24,000 | $30,000 |
| $700,000 | $7,000 | $14,000 | $21,000 | $28,000 | $35,000 |
| $800,000 | $8,000 | $16,000 | $24,000 | $32,000 | $40,000 |
| $900,000 | $9,000 | $18,000 | $27,000 | $36,000 | $45,000 |
| $1,000,000 | $10,000 | $20,000 | $30,000 | $40,000 | $50,000 |
Table by author.
While you may not want to put all your retirement money in dividend stocks, even allocating a portion of your total savings can help supplement your income without depleting your nest egg. And the good news is there are many good dividend stocks that offer high yields and that aren't risky investments.
Three high-yielding dividend options
Healthcare is a good sector for finding some solid high-yielding investments. Consider the following stocks as examples, all of which offer yields in excess of 4%.
CareTrust -- 5.7%
CareTrust REIT (CTRE 1.50%) is a real estate investment trust (REIT) that collects rent from healthcare facilities. Its major tenants include skilled nursing facilities and assisted living facilities. They make up 88% of its portfolio.
The REIT makes for a relatively stable investment. For the first three months of 2023, CareTrust reported that it collected over 96% of its contractual rent, and based on its funds available for distribution, its payout ratio was 76%. That suggests the yield is in good shape and it should remain that way given the ongoing need for these types of facilities in the future.
Viatris -- 4.9%
Generic and branded drugmaker Viatris (VTRS 0.87%) also pays a fairly high yield of 4.9%. Its products are broad, with the company having more than 20 globally recognized brands in its portfolio, including Lipitor, Viagra, and Lyrica. Viatris makes medicines for a wide range of therapeutic areas, such as eye care, oncology, immunology, gastroenterology, and many others. That diversity should make the business a stable one to invest in.
Over the trailing 12 months, Viatris has generated free cash flow totaling $2.5 billion, which is more than 4 times what it has paid out in dividends during that stretch -- $582 million.
AbbVie -- 4.4%
AbbVie (ABBV -4.58%) offers the lowest yield on this list at 4.4% but it has also been increasing its payouts for more than 50 years, making it a Dividend King. This includes the time when it was part of Abbott Laboratories (AbbVie spun off in 2013).
AbbVie's business relies heavily on a handful of drugs, with Humira being a key part of its lineup for years. Although Humira has begun losing patent protection, management believes Skyrizi and Rinvoq can replace it in the future.
And with AbbVie's acquisition of Botox maker Allergan in 2020, the company has a growing aesthetics business that gives it even more opportunities to pursue down the road. When in doubt, its cash flow can come to the rescue. AbbVie has reported more than $24 billion in free cash flow over the past four quarters, which is double the cost of its dividend payments ($10 billion).
These are just examples of three quality healthcare stocks that income investors can consider buying and holding for the long haul, or holding in retirement for some stable dividend income, but there are many other options investors can pursue and to help improve their financial situation in retirement.
