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Dividends and Retirement Income April 5, 2010

Posted by shaferfinancial in Finance, Uncategorized.
Tags: ,

Once you are able to philosophically give up on mutual funds, you can take a look at your retirement income goals and make some advancement.  I think one of the main areas of investment for folks has to be dividend producing equities.  There is much to learn about this area of investing and this post is not any where near an instruction manual, but here are the basics:

1. There are many companies that have a long history of paying dividends;

2. There are many companies that have a long history of paying increasing dividends;

3. There are many companies that pay a decent dividend yield today.

If you are investing with at least a 10 year time horizon, you are best to find a company that pays a decent dividend, has a long history of paying dividends, and a long history of increasing its dividends.

Once you locate that company you need to look at its profits and free cash flow and what percentage this dividend represents of each.  Then you need to think about what this company does to make its profits and whether that might be impinged in the future by technology or demographic or other types of developments.

Now I am not big into diversification, but many will tell you to own 25-30 stocks.  Personally, I own a total of 3, with 2 being dividend producers.  That way I can keep up with the details of those stocks, something I could never dedicate my time to do with 25 or 30 stocks.  I also follow the Buffett dictum of choosing the best stock my analysis has found, rather than the 25th!

Now you are investing in these stocks for their dividends, not for their capital appreciation, although with increasing dividends should come capital appreciation.  You might consider doing as I do and having a handful of “watched companies” to use when one company you own starts to look like it is having problems.  You can simply replace the stock with a watched company.

I track my dividend income with a simple spreadsheet.  I also reinvest dividends into the same stock.  Now you could also reinvest dividends into another stock if you wanted to start diversifying in that way.

Why invest in dividend producers?  When you approach retirement age there are several big questions.  First, is how much income can my stock portfolio produce.  If you know how much dividend income is being produced you have a much better idea of the income potential.  Secondly, by living off of dividends you don’t have to worry about retiring close to a bear market and having to sell stock.  This is of course the way stock portfolios get devastated!  Secondly, you have a built in inflation monitor.  As inflation destroys the dollars buying power, your dividends should go up to compensate.  Finally, dividends are currently taxed at a lower rate than income.  Found this article interesting and current [fellow HCN investors should enjoy it].

If you combined this with an EIUL and real estate investments, you can produce an abundant retirement that is set for whatever happens.  Add in some social security benefits and you have a well rounded retirement income.



1. David C Lewis, RFC - April 12, 2010

Absolutely brilliant Dave! This is something that I’ve given a lot of thought about in regards to equities and even does to fundamental savings products like life insurance. It’s nice to know in one’s old age that one doesn’t need to worry too much about a market correction while taking income if the investment is generating income for them.

2. http://www.zcpgsksg.com - July 9, 2013

fantastic put up, very informative. I wonder why the opposite experts of this sector don’t understand this. You should continue your writing. I’m sure, you’ve a great readers’ base already!

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