The world is graying – just ask my hairdresser. And people are living longer – just ask my Mother (just kidding Mom).
The most common question I hear is: Will my money last?
This is usually followed by: How much should I expect to pay for long-term care?
And once we do our ‘what-if’ financial planning scenarios, the next question is invariably: How will I generate enough income to replace my salary in retirement?
This need for income comes at a time when (a) there are increasingly more people seeking investment income, and (b) interest rates are comically low. I’ll show you how you can use dividend investing for income and modest growth and highlight the key risks that you’ll need to accept.
When it comes to investing, most people approaching retirement without a pension put a priority on having a predictable and lasting income stream to pay bills and give peace of mind.
It’s a tough time for people reaching this point because yields of many top-rated bonds are at record lows. Some bonds even lose value after factoring in inflation. Then there are the too-good-to-be-true ‘income solutions’ or too-scary-to-touch foreign bonds.
Right now, dividend investing to generate income is an excellent option for many people for several reasons:
• High dividend-paying stocks tend to outperform most other investments in periods of low or no economic growth – like now
• Growth of dividends has historically kept up with inflation in all but the most extreme periods of high inflation
• There is decent potential for growth of dividends since many companies have accumulated record high amounts of cash over the last few years
When you use dividend income to generate your income, you need to be able to accept a few uncertainties. The board of directors can reduce or eliminate dividends at any time. To minimize this risk, choosing companies that have never cut their dividends is smart, as is choosing companies that have a history of consistently increasing their dividends over time.
Another uncertainty you need to be able to accept is market price fluctuation. You’ll continue to get the same dollar amount of dividend per share that you own, but you’ll need to be comfortable with the market value going up and down on your statement. To minimize this risk, choosing companies with a history of relatively stable market value is smart if market price fluctuation makes you nervous.
There are other ways to generate income for your retirement salary. Preferred shares, Real Estate Income Trusts, corporate and government bonds all complement dividend-paying stocks in a good portfolio.
The key is to combine these investments in the right proportions to generate the retirement salary you want and give you the comfort you need.
Call anytime you like to talk about your income-generating challenges – perhaps I can help!