Rising and falling stock prices can attract a lot of attention, but dividends can play a huge role in an investor’s total returns. With Dividend Kings – which are companies that have successfully increased their annual dividend for at least 50 consecutive years – and dividend-focused index funds, dividends can be a reliable source of income. It’s a way for companies to reward shareholders for their patience.
Part of being patient should be delaying your cash dividends until retirement. Here’s why.
Add to cumulative effects
Most people don’t have hundreds of thousands of dollars they can use to make a one-time investment, but with averaging, time, and patience, you can get a good amount over time. . As you build your dividend portfolio, one of the best things you can do is enroll in a dividend reinvestment plan (DRIP). DRIPs take the dividends you receive and automatically use them to buy more shares of the company or fund that paid them, adding to the total return and increasing the compounding effect. From 1960 to 2021, reinvested dividends represented 84% of the S&P500total returns.
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let’s use it Vanguard High Dividend Yield ETF, which has returned nearly 8% annually since its inception in November 2006, for example. Taking into account the fund’s 0.06% expense ratio, here’s how much you would have accumulated in 25 years if its dividend yield had remained at 3% and you had reinvested it:
|Monthly contributions||Annual declaration (fees included)||Account value after 25 years|
Even if you take out the dividend yields, with a modest 8% annual return, you could accumulate more than $438,000 by investing $500 a month for 25 years, while personally contributing only $150,000. However, the real magic happens when you reinvest your dividends.
Use dividends as additional retirement income
A great strategy is to let your dividends accumulate until you retire and then start collecting cash dividend payments. In the total of the above account, here is what a 3% annual dividend payout would look like:
|Account Total||Annual dividend distribution|
At these annual payments, you could have an additional monthly income of $1,700, $3,400 and $5,100. If you follow the 80% rule – which states that you should aim to have 80% of your annual income in retirement – $40,000 to $60,000 in annual dividends would suffice for someone earning $50,000 to $75,000. $ per year.
Even if you can’t live on your dividends alone, they can be a great complement to other forms of retirement income, like a 401(k), IRAs, and Social Security. Getting dividend payouts along the way while you invest is great, but it’s often best to be patient and delay your payouts until retirement. You’ll probably be glad you did.
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Stefon Walters has no position in the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.