No matter what age we decide to do it, retiring means being able to live comfortably and not having to work another day in our lives. Usually, people who retire are those who were able to save up enough money or those who were smart enough to invest their money in something profitable to achieve financial freedom.In my case, I made it a point to be wise and careful about spending and investing my hard-earned cash. Aside from saving up a part of my regular income in the bank, I also made sure I placed my money in a secure and stable investment that would yield good income, without me, having to do much work.Interesting places to look into are stock investments and mutual funds. These types of investments are a source of dividend income, which are company earnings distributed to stockholders as cash or stock dividends.
Living off your savings in retirement sounds achievable, especially if, over the years, you were able to put in a lot of effort in saving a huge chunk of your income. However, deciding to live off the fruits of your investment can be a different story and may be quite a daunting move if you don’t know where to begin.
Getting Down to the Basics of Dividend Incomes
This leads me to this important topic that every individual wanting a smooth retirement must know when it comes to achieving financial comfort and freedom. Investing in stock and mutual funds can be a stable source of income by the time you reach your retirement age.
Since both stock and mutual funds allow you to earn passive income, it will allow you to actively focus on other income-generating endeavors as you allow the value of your stocks to rise.
By fully understanding and taking advantage of the benefits of a dividend income, retirement can be a pretty rewarding and hassle-free adventure. Here are some of the basic ideas behind dividend income:
In a nutshell, purchasing stocks from a company allows us to become part owner of that company, and entitles us to benefit from their profit. There are two ways to make profit as shareholders:
1. The investor gets paid in dividends and receives the company’s earnings in cash.
2. The company uses profits for further development and expansions. The success of the business will impact stocks and raise its value.
How to Live Off Your Investments
The most common route investors go through to achieve a comfortable retirement is by spending their interest income, mostly taken from bonds, and by selling their shares in stocks or funds. A concept known as the “four percent rule” helps retirees achieve a stable stream of income and a healthy account balance, ideally for a number of years.
Investopedia defines this rule as a gauge to help retirees determine the safe amount of funds that can be withdrawn from their accounts yearly. It may sound like a great strategy, but going down this route still requires strategizing, and practicing a bit of restraint and planning to make sure they’re not going beyond the safe rate for withdrawals.
Planning is an important step to achieve both financial freedom and a happy retirement. It’s also a crucial step to successfully live off your investments, without having to stick to that four percent. Yes, there is a way to go beyond four percent every year, without having to sell your shares or reduce your principal investment.
Growing Your Dividends Mean Growing Your Bank Account
Retirement can be a very exciting stage in an individual’s life, but achieving a smooth-sailing retirement does not happen overnight. It does require a lot of pre-planning, especially in knowing how and where you’ll be getting the funds to sustain both your leisurely and day-to-day needs.
I think it is important to start early in planning for retirement. It’s never wrong to envision the kind of life you want to live after years of working hard in that corporate job. I was personally able to enhance my retirement income because I did lots of research and allotted enough time to invest in dividend paying mutual funds and stocks, and in growing them.
Eventually, my dividend payments were able to generate a cash flow that sustained the kind of life I wanted to live as a retiree. I got to spend lots of time travelling the world and being with my family without having to worry about how to make ends meet.
By growing my dividends, I was also able to increase both my pension and Social Security. Now, think about this, if it helped me create a better lifestyle than the one I had pre-retirement, just imagine how it could change yours. It is not impossible to live entirely off your dividends if you took the extra mile to plan for your future.
An example of how you can do this is by following a Dividend Reinvestment Plan (DRIP) that will allow you to reinvest your dividends while buying additional stocks. A DRIP increases the value of an investment along with the compound interest.
Compounding investments allow you to generate growth by computing for the reinvested dividends on all your shares, including new ones, instead of just the shares you initially owned. In this way, you accumulate a higher number of shares and a higher payout, in just a short span of time.
For example, you own 500 shares of a retail company that currently trades at $64.28. The annual dividend of the company is at $2.22 per share, giving you $0.555 per share. This gives you a total of $277.50 quarterly for all your shares.
By implementing a DRIP, you give up the $277.50 to be able to purchase more shares. On the dividend payment date, you buy $277.50 over $ 64.28, which is equivalent to 4.32 shares, giving you a total of 504.32 shares.
Your current number of shares will yield $279.90 that you may again invest in the company’s DRIP. By the end of the year, you will have purchased 517.49 shares, which means more income to reinvest in more shares.
New to the Idea of Dividend Growth
There is definitely a huge advantage in compounding dividend income, especially if you have a lot of time to spare. What about those who have already retired or are just about to enter retirement, you might ask? Dividend growth is still part of the answer, but working on your yield at the same time will do the trick.
I know many retired investors who have been through this situation. In cases like this, I would suggest adding high-yielding investments such as preferred stocks, master limited partnerships, and REITXs to your portfolio to improve your portfolio yield.
Of course, it still won’t hurt to take advantage of traditional dividend growth stocks distributed by firms, such as Apple, Intel, and Qualcomm, among others. It is important to note that companies with high dividend growth rates help increase dividend income and help deliver more income to shareholders. Keeping in mind the long-term goal of receiving a larger payout will help in the success of your investment.
Benefits of Dividend-Paying Stocks
To help you further determine if dividend-paying stocks are something you’d like to get into, here are three important benefits to keep in mind.
1. Long-term dividend investments are the most rewarding. Here’s an example: If you have 10,000 shares in a company that pays quarterly dividends of $0.15 for each, this yields $1500 in annual interest payout, which can be re-invested back into the company for a higher payout.
2. Taking the time to build a portfolio of dividend-paying stocks ensures a large number of shares come retirement; this also means more income that you can live off of.
3. Dividends are more stable compared to earnings because companies that offer dividend-paying stocks are usually those that are well-established and resilient enough to ride out unstable markets.
Important Notes on Dividend Investing
Here are other important points to ponder if you really think this is something that’s worth your time and money. It is definitely important to know these things, especially if this dividend investing is something you would like to consider as your source of income when you retire.
1. Don’t forget about tax implications
When it comes to taxes, it is a fact that governments are always looking to tax whatever income they can get their hands on. This means dividends are not exempt from this rule and are oftentimes taxed three times the usual. In the US, dividends are taxed based on the federal withholding tax and income tax.
In my previous experience, this kind of ludicrous taxation left me with just a 50% dividend payout. At first, it did not seem bad at all, but do take note that this lessens the value of your stocks because for every dollar you get in dividends, you lose a dollar in stock value while getting only half of the income.
2. Steer Clear of Special Dividends
It is usually not a good sign when a company offers special dividends. This is usually a one-time distribution of a company’s assets, often paid in cash. Investors do not stand to benefit anything when this happens and is usually an indicator that the company is not experiencing any growth.
Companies with lots of room for growth will usually allow you to re-invest your earnings to benefit their expansion. I believe it is crucial to invest in mature and resilient companies that have little to no debt to ensure a regenerative cash flow.
3. Manage Expectations
When we invest in older and more established companies, it helps us in avoiding the pitfalls that can affect our earnings. I have seen many investors make the mistake of searching for dividend stocks with the highest yields and doing so with high expectations.
In my opinion, yield should not be the basis of your investment. There are so many companies with yields ranging from 20-50%, yet have poor operational performance. It’s important to note that a company’s latest performance may have a huge impact on its stock price.
Furthermore, do take note the yield is usually calculated as the percentage of the last dividend payout over the current stock price. This means that if the last payment was made more than a month ago and the stock price has decreased since, the yield percentage will be abnormally high. Again, never make the yield percentage a basis of your investment because this is not a reliable indicator of company growth.
The Road to Retirement Requires Hard Work
For me, retirement is not dictated by age or how long you’ve been in a certain industry. It really is about achieving financial freedom and having the means to live a comfortable life, even if it means living off your dividend stock income.
Being able to benefit from the fruits of your stock investments or mutual fund is an extremely gratifying experience because you know you are being rewarded for making the right decisions in planning for your future.
The road to retirement truly requires hard work, not just in terms of putting in the hours and effort in your day job. It requires hard work and responsibility in managing your finances and knowing how to grow your money by turning it into a sustainable means of income.
Retirement is a privilege and something that can only be achieved by those who have worked hard for it. If you want to be successful in dividend investing, it is only you who can truly teach and motivate yourself to do it.
For you to be able to fully live off your dividend stock income in retirement, you must have the discipline and patience today, which in turn, will yield great financial results in the future.