Even if you're not quite there yet, it's never too soon to start thinking about how you're going to pay your bills after you retire. After all, the odds of winning the lottery are always pretty slim, and very few of us are independently wealthy. It's something we'll have to plan for. For most of us, dividend stocks offer an optimal mix of benefits.
With that as the backdrop, here are the four biggest reasons to lean on dividend names once our working years are over, and our golden years have begun.
Social Security won't cut it
Did you know the largest Social Security checks paid to those who've begun accepting payments at their full retirement age is $3,100 per month? Not bad — that's about $37,000 per year, which is a relatively typical income for workers in the U.S. But it's not necessarily enough to pay for all the fun and travel you weren't able to do while you were working.
And even then, that sort of Social Security income is pretty rare, reserved for the very highest of income earners. Your check is apt to be considerably smaller as the average monthly payment currently lies just above $1,500, or $18,000 per year.
Healthcare will be unusually expensive
If you think healthcare is expensive for you now, just wait until you graduate from conventional coverage to Medicare. Yes, you're guaranteed coverage, and it'll probably only cost you on the order of a couple hundred bucks per month. But the basic coverage doesn't include things like prescriptions, vision care, dental service, and out-of-pocket costs. Help with paying for prescription drugs, co-payments, and the deductible “gap” can run you well over $1,000 per month, depending on your personal financial circumstances. And even so, not everything — like long-term care — is covered.
This waning health insurance protection materializes at the worst possible time in our lives — when we're most likely to need lots of care. Fund company Fidelity estimates the average individual will want to sock away $300,000 before retirement to pay all of their likely healthcare costs incurred after retirement.
Dividend income may help curb the impact of a savings shortfall.
Inflation isn't going away
To its credit, the Social Security Administration accounts for inflation, upping the average payout every year to reflect the higher prices retirees are facing. Last year's cost-of-living adjustment was a 1.6% increase, reflecting the Bureau of Labor Statistics calculation of 2020's average consumer inflation.
Broadly speaking, however, these increases don't always keep up with real inflation that people face, and instead reflect increasing costs for working-aged taxpayers. And even to the extent Social Security payments do keep up with price increases, they only materialize after price hikes are realized. Retirees may feel financial strain before the bigger checks are put in place.
That's not the case for dividend stocks, though. The consumer price increases that lead to bigger dividends tend to do so in relative real time, and in an exaggerated way. The S&P 500's dividend has increased annually by an average of just under 5.4% over the course of the past 30 years, handily outpacing overall inflation.
Dividend stocks still offer attractive price gains
Finally, while it's not the prioritized goal for most income-seekers, most dividend-paying stocks still experience a fair amount of capital appreciation too.
Take a name like Johnson & Johnson for instance. Over the course of the past 20 years, its quarterly dividend has grown from $0.18 per share to $1.06. Nice! That's an average yearly improvement of a little more than 9%. The stock's price, however, has grown from a split-adjusted $29 to $161 during the same timeframe. That's a compound annual growth rate of nearly 9% just from capital gains.
Granted, J&J is a particularly impressive example, and not every dividend-paying stock will perform quite as well. Enough of them can and will, however, let you live on their income while still growing rather than depleting your portfolio's value.
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