Supercharge Your Income With These Stocks

It's no secret that dividend-paying stocks are an essential part of any retirement portfolio. According to the Investment Company Institute, for example, more than half of investors over the age of 65 invest primarily for income. IRS data reveals that 59% of 2004 tax returns with qualified dividends came from investors aged 50 and up.

But all too often, investors believe that dividend-paying stocks are best-suited for people already in retirement. The same IRS data showed that only 15% of returns with qualified dividends came from investors under the age of 35 -- and that's a shame.

Dividend-paying stocks really show their merit with two things: time and reinvestment. And that means that only investors with lengthy time horizons can really take advantage of them to supercharge their retirements.

Talk about some extra scratch!
Consider a modest $1,000 investment in Johnson & Johnson back in July 1980. A year later, the investment would have been up 35% and paid another $50 in dividends. Holding on for the long run, however, would have returned quite a bit more:

But with dividends reinvested -- which only those investors who have other sources of income, like a salary, can do -- the returns are substantially better even than that:

Source: Johnson & Johnson Investor Relations, as of Jan. 5, 2008.

You didn't have to be a market genius to buy J&J in 1980. It was already a well-known blue chip with a proven track record of paying -- and increasing -- dividends.

Time and dividend reinvestment provided 499 additional shares, an extra $918 in dividend payments in 2008 alone, and a nearly doubled total return -- and a stronger retirement portfolio.

Finding the next dividend payer
To make the same kind of investment today, you need to find strong, stable companies with a history of regular and increasing dividend payments. Among the S&P 500 stocks with a current yield over 3% and a ten-year annualized dividend growth rate above 5% are:

Source: Capital IQ, a division of Standard and Poor’s.

While these aren't formal recommendations, their solid track record of raising dividends is reason enough for further research.

Ask not for whom the bell tolls
I'm not saying that younger investors shouldn't also hold riskier investments like small-cap and high-growth stocks, but to paraphrase Benjamin Franklin, an ounce of planning is worth a pound of retirement prosperity. And that means dividend stocks.

Building a portfolio of dividend-paying stocks early on is just one tenet of a successful retirement plan. For additional tips, consider a free 30-day trial to Motley Fool Rule Your Retirement where advisor Robert Brokamp helps investors approaching, nearing, or already in retirement develop plans to properly manage wealth.

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This article was originally published on Sept. 2, 2008. It has been updated.

Todd Wenning hopes everyone had a wonderful holiday season. Todd does not own shares of any companies mentioned. Johnson & Johnson is an Income Investor recommendation. Linear Technology is a Motley Fool Stock Advisor pick. The Motley Fool has a disclosure policy.