Unfortunately, for many people, a single source of retirement income will not be enough to sustain their lifestyle. it’s going to take a multi-angle approach. While some of the most obvious options for retirement income may be a 401(k) plan, IRAs, and Social Security, an underrated source of income is paying dividends.
Dividends are typically paid out quarterly, and they’re a way of rewarding investors for investing in and holding onto a stock that may not have the hypergrowth potential that often accompanies younger, smaller companies. With these three easy steps, you can receive thousands in monthly retirement dividends.
1. Invest in ETFs focused on dividend-paying companies
To receive a decent dividend income in retirement, you must first accumulate a good stake in a dividend-paying stock. Doing so in a sole proprietorship can be difficult and may work against your investment goals or prevent you from being as diversified as you should be. This is where dividend ETFs come in.
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Dividend ETFs can give you both the advantage of owning dividend-focused companies and maintaining diversification, as many of them consist of hundreds of companies spanning all industries. It also helps to spread some of the risks associated with dividend stocks, such as a company going through tough times and deciding to suspend its dividend payments, such as Delta Airlines and Boeing the two did so in March 2020 at the start of the COVID-19 pandemic.
There’s no specific dividend yield that’s considered “good” (largely because dividend yield fluctuates with a stock’s price), but generally speaking, you should look for ETFs dividend payouts that have a dividend yield of at least 2.5%. The more the better, but you should be careful not to strictly deprive yourself of a dividend yield, as this can be misleading. If a stock pays $3 in annual dividends and its price is $100, the yield is 3%. If the stock price falls to $50, the return becomes 6% and looks much more lucrative — except that doesn’t explain the Why behind the high yield.
2. Reinvest your dividends until you retire
If you invest in a dividend-paying stock, you can either receive your dividends in the form of cash payments or enroll in your broker’s dividend reinvestment program (DRIP) if they offer 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 of a DRIP, you should seriously consider it; this can add to the effects of compound interest and work wonders.
Say you invest $1,000 per month in a fund with a 3% fixed dividend yield that has been earning an average of 10% per year over 25 years. Here’s how the account totals would differ if you took the dividends in cash rather than reinvesting them:
|Reinvest dividends||Account total after 25 years|
Ideally, you won’t need the cash dividend payouts until you retire, so you can let them grow and accumulate until then. Even if you don’t reinvest dividends – although you should if you can – $1.18 million accumulated in a fund paying 3% will earn you $35,400 in annual dividends. With dividends reinvested, $1.86 million with a 3% yield will pay out $55,800 in annual dividends. This represents $2,950 and $4,650 in monthly dividends, respectively.
3. It’s going to take consistency
You don’t need millions of dollars in stocks 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 might seem like a lot on paper, but with consistency and a spend average, it’s very doable if you give yourself the time. With just $500 invested monthly and average annual returns of 10% (including dividend yield), you can accumulate over $986,000 in 30 years. With a yield of just 2.5%, that’s over $2,000 in monthly dividends.
Since you have a set investment schedule when using the cost averaging, it helps you stay consistent. You don’t want your investments to be sporadic or trying to time the market (especially during a bear market when prices are falling). The key is just to be consistent and let time and compound interest do the heavy lifting for you.
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Stefon Walters has no position in the stocks mentioned. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.