How are you really going to fund your day-to-day expenses in retirement?
A recent Wall Street Journal report pointed out something that has been on my mind lately, as my parents prepare to retire. They're in pretty good shape, financially speaking, and one key source of their income will be the pension that my dad is set to receive from a former employer.
Many people who are now in or close to retirement have a pension that will fund part (in some cases, a big part) of their retirement income needs. Often, these folks are able to get by quite comfortably on (mostly) pension income while taking only the minimum distributions from their 401(k) plans and IRAs.
But pension plans began to fall out of favor a couple of decades ago, and lots of employers have long since done away with them entirely. As the Journal pointed out, that means that there are an awful lot of people approaching retirement who don't have a pension, and who will need to rely on their retirement savings to pay the expenses that their meager Social Security payments won't stretch to cover.
That can be a challenge. But investing in dividend stocks -- before and during retirement -- and letting the dividends contribute to your income once you're retired can be a great way to meet that challenge.
The power of dividend stocks
The best dividend stocks -- those of steady, blue-chip companies with long histories of increasing dividends -- have advantages for folks near or in retirement that few investments can match. Those advantages start with the dividends themselves, of course, which can be reinvested for extra growth until you need to start taking them as added income.
That added growth can be significant. Electricity giant Consolidated Edison
One of my favorite illustrations of the power of dividend reinvestment is what Procter & Gamble
Solid growth, without "growth stock" volatility
Consider: The Dow Jones Industrial Average (INDEX: ^DJI) has risen about 27% over the past 10 years. That's not bad, though it's arguably a little misleading if you think about where the stock market was in October 2001, after the dot-com crash and the 9/11 attacks. Still, it's a better return than some funds have seen.
But compare that with a great stock like McDonald's
The power of rising dividends
What's more, many companies that regularly increase their dividends tend to see their stock prices rice over time. ExxonMobil
And those long histories of rising dividends? Every one of the stocks I've mentioned is on the Standard & Poor's list of "Dividend Aristocrats" -- companies that have raised their dividend payments every year for at least the past 25 years. Most of the Dividend Aristocrats should make great investments for years to come. That's not just because of the rising dividend payments themselves, but also because those rising dividends will tend to attract more investors over time -- and that, in turn, should help drive the stock's price as well.
Getting growth even when the market has stalled
Finally, even in times like these when the market's not cooperating, dividends can still power growth. As Foolish retirement guru Robert Brokamp recently pointed out to me, even if you assume that stock prices will stay absolutely flat -- unchanged -- a portfolio of dividend stocks with an average yield of 3% can generate annual returns of 8% or more over time, if you pick the right stocks (those with reliable, rising dividends) and reinvest the proceeds.
If you're not feeling ready to buy individual stocks, or just want to skip the research now that you're retired, a well-constructed dividend ETF like Vanguard High Yield Dividend
Fool contributor John Rosevear holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of McDonald's and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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