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The goal should be to save enough for retirement, so you don’t have to worry about outliving your savings. Along the way, though, there are things you can do to ensure you have retirement income coming in, and you’re not just relying on what you have saved up to that point. One of the main ways is to develop a solid dividend portfolio throughout your career.
Dividend stocks shouldn’t make up all of your portfolio, but they definitely play a solid role in well-diversified portfolios. With intentional investing, you can put yourself in a position to receive thousands in monthly retirement income. Here’s how.
1. Focus on Dividend Aristocrats
Not all stocks pay out dividends. Usually, older, more established companies pay dividends to reward investors because there’s likely less chance for hypergrowth in their stock price. On the other hand, younger companies tend not to offer dividends because they need to reinvest the profits into the business to continue growing. As you’re building out your dividend portfolio, you want to focus on companies with a history of maintaining dividends.
Dividend Aristocrats are companies that have increased their yearly dividend for at least 25 consecutive years. With a company that has reached that status, you know they have endured tough economic times while still managing to reward their shareholders. As you’re focusing on retirement, you want companies and funds that will provide some long-term stability in their dividends.
2. Use dollar-cost averaging to build up your portfolio
Consistency is a key pillar in investing. Rarely does the financial success many people aim for happen overnight, or even over a few years. Using dollar-cost averaging — which involves making regular investments at set intervals — will help keep you consistent and remove some of the emotions from investing (which is a good thing). To get to the point where you can receive thousands in dividend retirement income, you must accumulate a sizable holding in a dividend-paying company or fund, which takes time.
Let’s imagine you’re investing in a fund that returns 10% annually over 25 years. Here’s how much you would have accumulated at different monthly contributions:
Monthly Contributions
Total After 25 Years
$500
$590,000
$1,000
$1.18 million
$2,000
$2.36 million
Data source: author calculations
Even at $1,000 monthly, you would have managed to accumulate over $1.18 million while only personally investing $300,000. Compounding does a lot of the heavy lifting for you.
3. Reinvest your dividends until retirement
The above example is assuming the fund didn’t pay out a dividend. When you add in the dividends through the years, the effects of compound interest are increased. One of the best ways to get the most from dividends is using your broker’s dividend reinvestment program (DRIP). In a DRIP, your broker automatically reinvests the dividends you’re paid back into the company or fund that paid it.
If you made the same contributions above into a dividend-paying fund like the Vanguard High Dividend Yield ETF (NYSEMKT: VYM), which currently has a 2.83% dividend yield, here’s how your investments would stack up if you reinvested the dividend through those years and received the same 10% returns:
Monthly Contributions
Total After 25 Years
$500
$909,400
$1,000
$1.81 million
$2,000
$3.63 million
Data source: Author calculations.
At those totals, and with the 2.83% dividend yield, you can be receiving over $25,000, $51,000, and $102,000 in yearly dividends, respectively. Even with the “modest” $500 monthly contributions, you can manage over $2,000 in monthly dividends.
It may not be enough to solely live off in retirement, but when combined with other retirement income sources — like a 401(k), IRAs, or Social Security — it can all but ensure you’re living financially comfortable in retirement and focusing on what really matters: enjoying retirement.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
