3 reasons to invest in dividend-paying stocks

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Dividend stocks are an important part of most retirement portfolios. These stocks have a unique set of characteristics that are important to investors in their golden years. Don’t ignore these three benefits when making your retirement plan.

1. Income

Cash flow is the name of the game in retirement planning. You will stop working someday, but you won’t stop spending money. This void must be filled with income from new sources.

Social security is the most important source of income for most retirees. The average monthly benefit will be $ 1,657 by 2022, so many households will need more to meet their needs. One-third of people who retire today have retirement, and these typically add $ 10,000 to $ 20,000 to annual cash flow. You will usually have to rely on your own investments for any additional income.

Investment income generally comes from interest and dividends. Bonds are useful financial tools that pay interest at regular intervals, and they’re also popular among retirees because bond prices don’t fluctuate as much as stocks.

Dividend stocks also generate regular income streams, but they are always subject to market volatility. Some companies decide to take their profits and distribute them to shareholders. These are generally mature and stable companies with limited growth potential. They don’t have to invest aggressively in product development, new hires, or business infrastructure, freeing up more cash flow for the business. Instead of doing nothing with that money, they periodically issue checks to their investors.

Retirees may hold dividend-paying stocks in their retirement accounts or in a brokerage account. They will generate income that you can use to meet your basic needs and lifestyle goals. Right now, reliable dividend yields are between 2-3%.

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2. Tax treatment

Taxes are an important part of investment planning, but they are too often overlooked. This is especially true for retirees. For many investors, dividends benefit from preferential tax treatment.

If you happen to have a Roth IRA, you can enjoy tax-free dividend income. Returns on investments in a Roth are distributed tax-free before age 59 and a half, including dividends. You will need to establish a Roth using the income earned before full retirement, and you likely will not be able to contribute after you stop working.

Dividends are also tax-deferred in traditional IRAs and 401 (k) accounts. However, when you withdraw distributions from these accounts, they will eventually be taxed as ordinary income. This gives you the flexibility to decide when the tax is incurred, which is a strategic advantage. However, don’t expect to bypass the IRS like you can with a Roth.

Dividends may also be given special treatment in normal investment accounts. Dividends are considered “qualified” if they meet certain criteria, but it is very common for retirement accounts to produce eligible dividends. This essentially means that these distributions will be imposed on a capital gains tax rates rather than income tax rates, which can be beneficial for many investors.

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3. Stable growth

You can’t just ignore investment growth once you’re retired – it’s still important. Managing volatility is important if you need to withdraw distributions from your retirement account, but you also need to prepare for decades of potential cash flow needs. This is only possible with some growth in assets.

Dividend stocks are a great source of growth, but they also offer more stability than the market in general. the ProShares S&P 500 Aristocrats ETF (NYSEMKT: NOBL) holds Dividend Aristocrats. In addition to dividends paid to shareholders, the price of the ETF has increased by almost 80% over the past five years. Investors get periodic cash flow while their asset pool also grows.

Even though the ETF only holds around 65 stocks, it is less volatile than the market in general. His beta is only 0.70, indicating that it does not rise or fall as drastically as the S&P 500. Dividend stocks are rarely growth stocksbecause their sales and profits tend to grow slowly and steadily over the long term. Their cash flow is more predictable, so these stocks typically have more modest valuations based on expected dividends. This means that they don’t have as much room to fall during bear markets.

Dividend-paying stocks offer better long-term growth potential than bonds. At the same time, they tend to be less risky and less profitable than growth stocks. These are two ideal features for retirement investment portfolios.

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Ryan downie has no position in any of the stocks mentioned. The Motley Fool owns and recommends the ProShares S&P 500 Aristocrats ETF. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner providing financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.


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