In today's low-interest-rate world, dividend-investment strategies can help retirees find new sources of current income.
One of the outcomes of monetary policy over the last few years has been to punish savers with ultra-low interest rates at a time when people in retirement need current income. We have all been taught to save and invest during our working lives and then live from CD and bond income when we retire, but today that strategy no longer works so well. Changing times require changing strategies, and today, dividend-investment programs can offer potential opportunities for people in or approaching retirement.
Taking a look at those stocks which pay dividends presents the investor with a wide spectrum of performers. At the top of the list are the so-called "dividend aristocrats." These stocks have a 25-year track record of continually increasing dividends payments each year. They can provide retired investors with a stream of income from those dividend payouts, and the aristocrats tend to hold up better during downturns in the overall market. For younger investors, the dividends can provide a nice bonus beyond advances in the share price, and those dividends can be used for more stock purchases which could accelerate overall portfolio growth.
Investing in the so-called"dividend aristocrats" can be accomplished by buying the individual stocks or through exchange-traded funds.
Standard & Poor's maintains a list called the S&P 500 Dividend Aristocrats Index which is restricted to S&P 500 companies which have increased dividend payments each year for at least 25 years. The stocks on this list must meet certain liquidity and market-capitalization requirements and generally are well-known investing names.
Two popular ETFs offering exposure to dividend aristocrats are the ProShares S&P 500 Aristocrats ETF (NOBL) and the SPDR S&P Dividend Index ETF (SDY). Investors who prefer individual stock purchases can focus on well-known dividend aristocrats like AT&T (XNYS:T), Coca Cola (KO), Proctor and Gamble (PG) and Exxon Mobil (XOM).
Sophisticated investors can also consider selling covered-call options against dividend stocks, which is considered a conservative method for adding further potential gains to a stock portfolio.
This strategy can help increase current income in today's low-interest-rate environment and can also boost long-term growth strategies through dividend-reinvestment plans. No strategy is perfect, and this one can limit the upside potential of your stock holdings, but it also offers the potential to improve cash flow and overall portfolio growth.
Many high-quality, dividend-paying stocks pay dividends in the 2%-3% range and covered-call income can boost overall performance. Coupled with upside potential of the underlying stock, many dividend/covered-call strategies shoot for high single or low double-digit annual returns. This approach requires some expertise and understanding of option premium, but used correctly, dividend-paying stocks or exchange-traded funds can offer another approach to help improve your retirement and cope with today's challenging low-rate environment.
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