Dividend Investing for a Smart Retirement
At HCM Wealth Advisors, we are focused on ensuring you have sufficient income to live your best retirement. To do that, we utilize a Dividend Growth Portfolio.
What is a Dividend?
As a stockholder, you are entitled to a portion of a company’s profits. When the shareholders receive a portion of the company’s profit, that’s known as a dividend. Dividends are decided by the company’s board of directors, though they must be approved by the shareholders through their voting rights. Dividends are usually paid quarterly, but some are paid annually, and they’re all paid on a per-share basis.
Why invest in dividends?
Historically, dividend paying stocks outperform non-dividend paying stocks. A study going back to 1927 found that investors in dividend stocks would have accumulated 3.3 times as much money as compared to non-dividend paying stocks. Dividend paying stocks generated twice as much return per unit risk during the study, outperformed more months than non-dividend paying stocks, and had more months with positive returns.
Dividend investing can allow you to be a more patient investor, focusing on whether your dividend checks are increasing regularly rather than paying attention to the whims of the stock market. This has many advantages, including reducing frictional expenses, increasing your ability to take advantage of deferred tax liabilities, and ultimately, the stepped-up basis loophole.
Most dividends are taxed at a lower rate than normal income. So called “qualified dividends,” which are paid by a US company or qualifying foreign company and whose holding period have been met, are taxed at capital gains rates rather than ordinary income rates. As we say, “it’s not what you make, it’s what you keep,” and in this case, a qualified dividend lets you keep a lot more of your cash to do with what you will.
During your accumulation years, dividends provide an additional source of income with which to invest and grow your retirement account. Through the phenomenon of compounding, taking that extra cash and reinvesting it early can have fantastic payoffs down the line. Once you’ve reached retirement, dividends provide a reliable source of income to cover expenses while you still retain ownership of the stocks which will continue paying dividends, creating a reliable stream of income. In fact, with a little planning, you can live strictly from your dividends.
Dividend investing represents a hedge against market volatility. If a stock’s price falls, a dividend cushions the blow by providing income in the downturn, and if a stock is rising, the dividend provides a cash flow in addition to increasing capital gains.
Investing legend Warren Buffett enjoys heavy positions in dividend-paying stocks, so much so that his company, Berkshire Hathaway’s, portfolio paid the company almost a billion dollars in dividends in the second quarter of 2017 alone. He’s seen the wisdom of this investing approach, and enjoys the fruits of it; shouldn’t you?
How do Dividends Provide Income?
It’s our philosophy that for income to be secure it must be in cash, dependable, diversified, and growing. Our Dividend Growth portfolio does provides a secure retirement following this philosophy:
- In Cash: As the saying goes, “you can’t fake cash.” Dividends represent a regular income stream to your account. You can use that to pay bills, reinvest, go on vacation – the money’s yours.
- Dependable: With dividend-paying stocks structurally positioned to provide you a secure retirement, we go one step further, only investing in stocks with solid histories of returning dividends every quarter for years going back.
- Diversified: Our Dividend Growth Portfolio is diversified across 11 sectors. Diversification minimizes the risk of loss, helps preserve capital, and generates stable returns. Risks are minimized by spreading your investments across multiple sectors, such that if one sector has poor performance, another sector can make up for it. Capital is preserved by minimizing losses in any one sector – a very important feature for anyone in the retirement stage of their lives. Finally, multiple sources of income increase the stability of returns.
- Growing: A study looking at dividend growth vs inflation found that, after 51 years, dividends had seen 32% growth above inflation. Moreover, 61% of the time dividends outgrew inflation on an annual basis. Furthermore, this study simply looked at dividends across the S&P 500, not a methodically chosen selection of high-growth dividends, which you would receive investing in HCM’s Dividend Growth portfolio. Inflation can be corrosive to a retirement plan, and this Dividend Growth strategy operates as a bulwark against it. This means that your income is secure.