Dividend Stocks: A key building block for a retirement portfolio

Your Investments: One asset that cuts across most investment portfolios and should be used as a building block is dividends-paying stocks.

By AARON KATSMAN
Money cash Shekels currency 521 (photo credit: Reuters)
Money cash Shekels currency 521
(photo credit: Reuters)
The financial media is full of retirement advice. Avenues to generate income to fund retirement, working longer to make up for poor savings habits and “hot stocks” for a retirement portfolio are among many topics written about.
The problem with this content is that it’s “one size fits all” retirement advice, and due to the complexity of individual retirement planning, it falls short of providing quality advice.
Retirement planning has to be specialized and personalized to the individual retiree. An approach for your neighbor who has $3 million in the bank and a few rental properties is not going to be relevant for you if you have $500,000 in savings, a few years left on a mortgage and children and grandchildren to support. When reading these articles I am often left with the feeling that the authors have never sat down across from a living, breathing retiree.
One asset that cuts across most investment portfolios and should be used as a building block is dividends-paying stocks.
How do dividends help? There has been a lot of research done on the impact of dividend investing versus non-dividend investing. I have quoted this previously and am doing it again because of its relevance to the topic at hand. According to a report from Lebel Harriman: “Dividend income has represented roughly onethird of the monthly total return on the Standard and Poor’s 500 since 1926. According to S&P, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s – in other words, more than half that decade’s return resulted from dividends – to a low of 14% during the 1990s, when investors tended to focus on growth.
“If dividends are reinvested, their impact over time becomes even more dramatic. S&P calculates that $1 invested in the Standard and Poor’s 500 in December 1929 would have grown to $57 over the following 75 years. However, when coupled with reinvested dividends, that same $1 investment would have resulted in $1,353. (Bear in mind that past performance is no guarantee of future results, and taxes were not factored into the calculations.)” We see from this that dividends can add a huge impact in the overall return of a portfolio. As such, it should be the starting point of an equity allocation for an overall portfolio.
It’s also important to note that the dividend helps cut down on the volatility of a stock. While all stocks have the potential to lose much of their value, solid companies with long histories of paying dividends (such as Johnson and Johnson, Chevron and Philip Morris) – or even better, increasing dividends – tend to be companies doing well and generating profits and substantial cash flow, and they are returning that money to shareholders.
Mark Mobius, the famed executive chairman of the Templeton Emerging Markets Group, was quoted by Seekingalpha.
com as saying: “Dividends are very important, not just because investors like to receive the income they can potentially offer. We think dividends can be an indicator of good corporate governance. In the past, most companies in emerging markets preferred to put profits back into their businesses, rather than pay it out to shareholders. But today more are engaging in dividend payouts, and we think this is a good thing. If a company is giving dividends to shareholders and still has enough cash left over to expand and make needed capital investments, it’s very positive in our view.”
While Mobius is speaking about emerging markets, the same argument can certainly be made in relation to developed markets such as the US.
Retirement paycheck Part of retirement planning is to be able to create a consistent revenue stream to help supplement pension and Social Security income. According to well-known dividend-growth investor David Van Knapp: “In retirement, income is of primary importance. More specifically, purchasing power is of primary importance. Dividend-growth investing builds and maintains purchasing power that keeps pace with inflation. So it strikes me as a natural way to accomplish my primary goal in retirement, which is to have enough cash in my wallet.”
The beauty of investing in dividend-paying stocks is that you get the best of both worlds. Not only do you get the potential capital appreciation that stock investing gives you, but you also receive a steady income stream that is at least as competitive with – if not more than – investing in bonds.
With more than a few large, blue-chip companies paying dividends that are in excess of 4 percent annually (compared with about 2% for a highly rated bond), many retirees can enhance their income streams with these stocks.
There is certainly value in dividend-paying stock investing if done in a context that helps you meet your retirement goals. Speak with your financial adviser to learn how to incorporate dividend-paying stocks in your portfolio.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.aaron@lighthousecapital.co.il
Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.