Dividend Growth Stocks For A Successful Retirement Plan
The basic steps for getting to and living in retirement look something like this:
--Save money.
--Invest that money wisely.
--When you have enough money, retire.
--Live comfortably by drawing down on what you have saved and invested over the years.
The conventional wisdom used to be that you could safely draw down about 4% of your portfolio in retirement without worrying about running out of money over a period of 30 years.
That wisdom is no longer conventional. It has fallen out of favor, in large part due to low-interest rates. When short-term treasury bills were yielding more than 4%, guaranteed, it was a lot easier to pull off. Now, at more like 1%, not so much.
Live The Dream
The dream scenario for a retiree is a guaranteed source of passive income, like a salary that you don't have to work for. Something that, through thick and thin, will always kick out monthly or quarterly checks for you. That way, you don't have to worry about low-interest rates or stock market fluctuations.
Now, "guaranteed" is a tough hurdle, and isn't a word you can often use when you're talking about the stock market. In fact, about the only thing that's guaranteed is that stocks will go up and down, and you won't be able to predict when, especially in the short term.
But with some stocks, you can get reasonably close to guaranteed about one other thing: Dividends. There are a lot of blue-chip names out there that have paid dividends--and annually increased their dividends--for many years, and even decades. Past performance is no guarantee of future results, as you may have heard, but dividends from some stocks might be as close to a sure thing as you can expect out of the markets.
Putting It Into Practice
Let's have a look at how dividend payers can help buttress a retirement plan and meet your retirement goals.
Consider a portfolio invested in 75% stocks and 25% bonds, with the stock portion invested entirely in an S&P 500 index fund. Using the publicly available WealthTrace Financial Planner, we ran a retirement plan for a 45-year-old couple with $300,000 in investment assets and annual retirement expenses of $50,000. The result? Just a 47% probability of funding all of their retirement goals:
WealthTrace can run a sophisticated Monte Carlo simulation to help estimate the probability of a retirement plan's success. Find out more here.
The volatility (as measured by standard deviation) for the S&P 500 has been about 17% over the last decade. This is a big reason the plan has such a low probability of success. If a portfolio largely made up of S&P 500 stocks gets hit with a market correction, especially early in retirement, you could be stuck having to sell stocks to cover living expenses at exactly the wrong time (when those stocks have declined in value).
Replacing the stock portion of the portfolio with a basket of dividend-growth stocks, on the other hand, gets us a lot closer to where we need to be:
The assumed volatility of the portfolio drops considerably under this scenario, because dividend-paying stocks don't tend to react as much to market swings. The stocks go up and the stocks go down, guaranteed, but their dividends--and annual increases in their dividend payments--are nearly as guaranteed.
What are some dividend growth stocks to consider? Be sure to have a look at our previous article mentioning Altria and a few other companies specifically for ideas. Here are more:
Company |
Ticker |
Yield |
5-Year Dividend Growth |
Consecutive Dividend Increase (Years) |
AT&T |
5.1% |
2.3% |
32 |
|
Chevron |
3.9% |
8.5% |
28 |
|
Coca-Cola |
3.3% |
8.4% |
54 |
|
Realty Income |
4.2% |
5.6% |
23 |
|
Southern Co |
4.5% |
3.6% |
16 |
Data as of 11/17/16
Quality Comes At A Cost
We're not the first ones to notice the income potential of dividend payers, of course. The stocks of many steady dividend payers have been on the rise for quite a while now, and thus some of their yields are lower than they have been historically. This also means that the stocks are pricier, and could be subject to a decline in price in the case of a market correction.
But that's part of the point. The stocks we're talking about here are ones that will provide that passive income stream in the form of a dividend, no matter what the market does. Dividend growth stocks can be a very valuable part of a successful retirement plan.
What would increasing your savings rate or investing in different asset classes do to your retirement plan? Could you handle a stretch of stock-market volatility? WealthTrace can help you find ...
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