Unfortunately for many people, a single source of retirement income will not be enough to sustain their lifestyle; it will take a multi-angle approach. Although some of the most obvious options for retirement income may be a 401 (k) plan, IRA, and Social Security, an undervalued source of income is dividend payments.
Dividends are generally paid quarterly and are a way to reward investors who invest and hold a stock that may not have the overgrowth potential that often comes from younger and smaller companies. With these three simple steps, you can receive thousands of monthly retirement dividends.
1. Invest in ETFs that focus on dividend paying companies
To receive decent dividend income in retirement, you must first build up a good stake in a dividend-paying stock. Doing this in a single company can be difficult and can go against your investment goals or cause you not to be as diverse as you should be. This is where dividend ETFs come in.
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Dividend ETFs can give you the benefit of both holding dividend-focused companies and maintaining diversification, as many are made up of hundreds of companies across all sectors. It also helps to spread out some of the risks associated with dividend stocks, such as a company going through tough times and deciding to suspend dividend payments, such as Delta Airlines And Boeing both did so in March 2020 during the early stages of the COVID-19 pandemic.
There is no specific dividend yield deemed “good” (especially since the dividend yield fluctuates with the price of a stock), but in general, you should look for dividend ETFs that have at least a 2.5% dividend yield. The higher the better, but you need to be careful not to strictly exit the dividend yield as it can be misleading. If a stock pays $ 3 in annual dividends and its price is $ 100, the yield is 3%. If the stock price drops to $ 50, the return becomes 6% and apparently much more profitable, except it doesn’t explain the Why behind the high yield.
2. Reinvest your dividends until retirement is reached
If you are investing in a dividend-paying stock, you can receive your dividends as cash payments or sign up for 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 for a DRIP, you should strongly consider it; it can increase the effects of compound interest and work wonders.
Let’s imagine you’ve invested $ 1,000 a month in a fund with a fixed dividend yield of 3% that has returned, on average, 10% a year over 25 years. Here’s how the account totals would differ if you took the dividends in cash rather than reinvest them:
|Reinvest dividends||Total account after 25 years|
|No||1.18 million dollars|
|Yes||1.86 million dollars|
Ideally, you won’t need the cash dividend payments until your retirement, so you can let them grow and increase until then. Even if you don’t reinvest dividends, even though you should if you have the chance, the $ 1.18 million accumulated in a fund that pays a 3% yield will give you $ 35,400 in annual dividends. With dividends reinvested, $ 1.86 million at a 3% yield will pay $ 58,100 in annual dividends. That’s $ 2,950 and $ 4,650 in monthly dividends, respectively.
3. It will take consistency
You don’t need millions of dollars in stock for a good retired dividend income, but you will need a good sum if you want thousands of monthly income. A number like $ 1 million may sound like a lot on paper, but with consistency and dollar cost averaging, it’s very doable if you take the time. With just $ 500 invested monthly and an average annual return of 10% (including dividend yield), you can accumulate over $ 986,000 over 30 years. With only a 2.5% yield, that’s more than $ 2,000 in monthly dividends.
Since you have a set investment schedule when using dollar cost averaging, it helps keep you consistent. You don’t want your investments to be sporadic or find yourself trying to time the market (especially during a bear market when prices are falling). The key is to just be consistent and let time and compound interest do most of the heavy lifting for you.
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Stefon Walters has no position in any of the titles mentioned. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.