Need another income stream? Here are 5 reasons to invest in dividend-paying stocks for retirement. – USA TODAY

Posted: September 30, 2020 at 1:51 am


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Selena Maranjian, The Motley Fool Published 7:00 a.m. ET Sept. 29, 2020

It's a terrible mistake to ignore dividends when you're investing, as they can be powerful aids in growing your portfolio while you're still working, and they can serve you particularly well in retirement, too. But don't think of dividend-paying stocks as only appropriate for older investors.

Here's a look at five key reasons you should consider adding some (or many) dividend-paying stocks to your portfolio.

The first reason is perhaps the most obvious one: Dividend-paying stocks generate income. As an example, if you have a portfolio worth $400,000 with an average dividend yield of 3%, you're positioned to receive $12,000 each year, just from dividends. That money can be reinvested in additional shares of stock, to plump up your portfolio further, or it can be used for living expenses.

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Dividends aren't typically static, either: When they're being paid out by healthy and growing companies, they tend to be increased over time often annually. This can help your income streams keep up with inflation, which has averaged about 3% annually over long periods.

Check out a few examples below.

Company

Recent Dividend Yield

5-Year Avg. Annual Dividend Growth Rate

Starbucks

2%

20.7%

Microsoft

1.1%

10.5%

PepsiCo

3.1%

7.8%

Target

1.8%

4%

Chevron

7.2%

3.8%

Data source: Author calculations, Yahoo! Finance.

When you search for dividend-paying stocks for your portfolio, look not only for a meaningful yield, but also a payout that's growing well over time.

Another upside of dividend-paying stocks is that they're often relatively stable, compared to stocks of other companies. This is not always true, of course, but in general, for a company to commit to paying its shareholders a certain sum on a regular basis, its managers will be fairly confident of reliable revenue and earnings. That's why you'll find that a large proportion of blue-chip stocks are steady dividend payers. (On the other hand, many relatively young and fast-growing companies do not pay dividends at all, because they're plowing every available dollar into furthering their growth.)

(Photo: Getty Images)

Remember, too, that dividend-paying stocks don't merely offer dividends. The shares are still tied to companies that are working hard to grow and become more valuable over time. Thus, if you invest in healthy and growing dividend payers, you'll likely enjoy not just dividend income that increases over time, but also a stock price that increases over time and not necessarily at a paltry rate.

Indeed, when academics Eugene Fama and Kenneth French studied stock market data from 1927 to 2014, they found dividendpayers outperformed non-payers, averaging 10.4% annual growth vs. 8.5%. Here are some more examples of dividend payers:

Company

Recent Dividend Yield

10-year Avg. Annual Stock Growth Rate

Sherwin-Williams

0.8%

25.2%

Lowe's

1.5%

23%

Nike

0.8%

21.2%

Costco

0.8%

19.8%

Amgen

2.6%

17.4%

Discover Financial Services

3.3%

14.4%

Clorox

2.1%

13.9%

Kroger

2.2%

13.1%

Verizon Communications

4.3%

9.7%

Data sources: Yahoo! Financial and theonlineinvestor.com.

Finally, if you're relying on income from dividend-paying stocks in retirement and you end up not needing to sell off those shares over time for additional cash, you'll be able to leave them to your loved ones. This is a meaningful advantage over some other income-producing options, such as annuities. Fixed annuities have the advantage of providing even more reliable income, and they are worth considering in your retirement planning. Indeed, you may end up wanting to set up income streams in retirement from both annuities and dividends.

Don't dismiss dividends as only suitable for older investors and retirees. They have a lot to offer investors at every stage of life.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Selena Maranjian owns shares of Amgen, Costco Wholesale, Microsoft, Starbucks, and Verizon Communications. The Motley Fool owns shares of and recommends Microsoft, Nike, and Starbucks. The Motley Fool recommends Amgen, Costco Wholesale, Lowe's, Sherwin-Williams, and Verizon Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short November 2020 $85 calls on Starbucks. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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Need another income stream? Here are 5 reasons to invest in dividend-paying stocks for retirement. - USA TODAY

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September 30th, 2020 at 1:51 am

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