Saturday, February 11, 2012

Retiring on Dividend Earnings

All investors like to make a return on their investment, and stock dividends give a great return on your investment. There is no guarantee of dividend payment, but it is unusual for most companies not to pay out every year. Investors can use these dividend payments to fund an expansion in their portfolio or just take the money out.

Most companies that are doing well issue dividends to shareholders annually, but this depends on the company being successful. If a company exceeds targets it can pay a larger dividend and if it is struggling it can cancel the dividend payments completely.

What are Dividends?

Dividends are a bonus paid out of profits to shareholders, with a small amount paid to the holder of each stock. For investors with a small stake and few shares it might not amount to much, but it can add up for large shareholders. Pension schemes and other large investors use this income to supplement the proceeds of their investments, and you can use them in the same way to help fund your retirement without having to sell your shares.

In fact, many investors use the dividend yield of a stock to help influence their buying decisions. One trading theory is that a high dividend yield indicates that the stock is selling cheap and might increase in the future. This can make it a desirable investment, but investors should take care to ensure that the company is not falling on hard times.

The size and frequency of any dividend payments are issued to stockholders when the company files its accounts. These should be issued to all shareholders, who can use them to see how their investment is performing.

Using Dividends

While you are working and amassing shares to build a nest egg, it makes sense to invest the dividends back into buying more shares. This is a great way to increase your stock portfolio without having to spend any of your own money.

Alternatively, people use the dividend payments to pay for the nice things in life. They spend the money to pay for a holiday, a new car or anything else they might need a lump sum to pay for.

In Retirement

Once you retire, you can continue to use dividends in exactly the same way as you did previously. However, most retired people are on a reduced income and might even struggle to survive on their pension. For these people, the extra income that comes from the dividends certainly makes life a lot easier. It is important, however not to rely on these dividends as the companies can decide not to issue them at any time. Shareholders should treat them as a bonus rather than part of their income.

For most retired people, it makes sense to hold onto any investment in the stock market for as long as they can afford to. The long term benefit to their income from the dividends might very well outweigh the short-term gains from selling the stock and living off the proceeds.

3 comments:

  1. It is important to focus on both Dividend Payout ratio and dividend yield before considering dividend income as long-term income strategy.

    Lower dividend payout ratio e.g less 50-60% will have more sustainable dividend paying capability over economic cycles.

    ReplyDelete
  2. In retirement, to depend on dividends from stock portfolio, you must have a dividends return large enough to cover your life style. This means a fairly large stock portfolio.
    It's best you have other IGAs to cover your life style in case your dividends income from your stock portfolio fall short and you are forced to sell some stocks at the wrong time.
    In short, the best scenario is you have enough IGAs to generate more than enough for your life style. Or else, you have to lower your life style.

    ReplyDelete
  3. many investors use the dividend yield of a stock to help influence their buying decisions.

    ReplyDelete

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