Social Security isn’t going to disappear in the foreseeable future, but it’s probably not going to cover all your retirement expenses either. That’s worrisome for those counting on their checks to help them stay afloat.
There’s nothing else quite like Social Security out there, but there are other low-effort ways to boost your retirement income. Here’s one strategy worth considering.
Dividend stocks can give you cash every year
Dividend stocks are stocks that pay shareholders money, usually quarterly. Companies that do this are often large, stable businesses that have extra cash on hand. They choose to pass this along to shareholders, and shareholders may reinvest that money or spend it as they choose.
At first glance, dividend stocks may not seem all that impressive because you usually only get a few cents to a few dollars per share that you own. If you invest $100 in a stock with a dividend yield of 4%, you’ll only receive $4 in dividends in a year. But if you invest a substantial part of your nest egg in dividend stocks, it can add up over time.
If you invest $100,000 in dividend stocks with an overall dividend yield of 4%, now you’re getting $4,000 per year that you can spend however you want. And if you invest $300,000 in dividend stocks, you’ll get $12,000 per year with an overall dividend yield of 4%. That’s not too far from what some people receive from Social Security in a year.
Reinvesting your dividends probably makes sense while you’re still working, but once you retire, you can live off this money. Doing this will enable you to leave your savings invested for longer where they can continue to grow and earn more dividends.
A few caveats
While dividend stocks can make a great addition to your portfolio, it’s worth noting that dividends aren’t guaranteed. Companies can reduce or even eliminate dividends if they fall on hard times, though many do their best to avoid this.
Also, a high dividend isn’t necessarily an indication of a great stock. You want to make sure that the company can afford to pay the dividend over time and that it’s a smart investment for your portfolio before you sink any money into it.
How to start investing in dividend stocks
If you’d like to add dividend stocks to your portfolio, the Dividend Aristocrats list is a great place to start. These are companies that have consistently increased their dividends for at least 25 consecutive years. There’s also the Dividend Kings list, which contains companies that have raised their dividends for at least 50 consecutive years. While there are no guarantees in investing, going with some of these companies is a pretty solid choice for those who want to make dividends a key piece of their retirement income.
Another option is to invest in a dividend index fund. Index funds are bundles of stocks purchased together that mimic the performance of a market index. Dividend index funds focus on stocks that consistently offer dividends to their shareholders. These are usually pretty affordable to own, and they diversify your money so no single stock has too much of an effect on your portfolio.
If you’re new to investing or dividend stocks, you can always start out small and then increase your holdings over time as you gain more confidence. But if you plan to incorporate dividend stocks into your retirement plan, it definitely pays to start now.