When many investors start thinking about dividends for retirement, they go straight for the highest yielding stocks. Why not, some might ask. But is this really the best strategy?
If it seems too good to be true, you can bet it probably is. That high dividend yield might not last. Dividend yields for many companies are higher usually because their stock prices have been beaten down. And the stock prices are beaten down for a reason: The market doesn’t like the prospects for the company going forward.
But there is so much free information readily available today that we can find relatively high dividend yields from solid companies with a long history of increasing their dividend payments. This is gold for a retirement portfolio, as we will show in this article.
The Dividend Portfolio
There are some great companies out there who are dividend champions. We found a few that have had over 13 years straight of increasing their dividends. These companies also have above market average dividend yields. This portfolio is presented below:
yEARS INCREASING DIVIDEND
Pharmaceutical - Distribution
Utility - Electric/Gas
Oil and Gas
Oil and Gas
Technology - Software
REIT - Retail Stores
Utility - Electric
REIT - Healthcare
*Data as of 12/26/17.
The average dividend yield for this portfolio is 4.1%, which is well above the average S&P 500 dividend yield of 2.2%
Running The Retirement Plan
We like to run retirement plans using Monte Carlo simulation. In the WealthTrace Planning software, we are able to run 1,000 different scenarios on the plan on calculate how many times the plan ran out of money. This allows us to calculate the probability of never running out of money in retirement.
We ran a case study using a couple that is in their 50s and will retire in about 15 years. They have $750,000 saved, all in their IRAs. It is currently all in an S&P 500 index fund.
We assumed annual returns of 7.5%, with ¼ of the return coming from dividends. We found their probability of never running out of money to by 64%. You can see the simulated returns below:
We then changed their portfolio to invest in the dividend portfolio we showed before. In reality you want more stocks than this, but for this case study we will assume a dividend yield of 4.1%. We also assumed that the dividend payments will never be cut and that the stock prices increase by 3.4% per year.
When we ran this, we found that the probability of plan success jumps all the way up to 95%. That is a huge jump and it is solely due to the rock solid nature of the dividend payments from these companies.
Dividends For The Long Run
It’s important to begin investing in dividend payers early due to the power of compounding. Reinvest the dividends and make sure the companies have a long history of never cutting their dividends, even in recessions. This can set you up for a stress-free retirement when you live off of the income.