Who wants to work until they die? I know I most certainly don’t! This main thought and fear of having to work until we die motivates us to find a way to make money in our sleep or invest in something to get our money working for us. Most people who invest in stocks are primarily looking for a couple things. Most people would agree that what motivates them to invest in the first place, is to grow their wealth and retire from the 9 – 5 by utilizing their best income stocks from a portfolio they built and grew over time.
The second factor that drives people to invest is having SECURITY or INCOME to last them throughout their retirement years so they don’t have to go back to work because their money runs out. It’s one thing to retire from the workforce for a few years and you have to go back to work because you run out of income to support your lifestyle in retirement. It’s a completely different scenario to retire and never have to return to the workforce because you have enough income to sustain your lifestyle in retirement.
The second scenario sounds really nice doesn’t it? Sadly, this is the hardest challenge folks have had when they retire. They simply outlive their income due to many variables that they didn’t account for while they were working and growing their wealth. Not to mention, the average man and woman are living longer due to medical advances from technology advancing as well.
Dividend Income Investing
So how do you retire exactly with the correct strategy so that you don’t have to worry about ever going back to work in your 70’s and 80’s when you should be enjoying the fruits of your labor? I wish there was just one simple answer to this question and it was that easy. Unfortunately, there isn’t just one strategy that works because everyone is different and has different financial needs due to their lifestyles. However, there is a strategy that will help combat inflation throughout time, allow the investor to leverage compounding of their money at a much faster rate rather than investing all of their money into fixed income securities like bonds and treasuries and allow the investor to continue increasing their wealth throughout time, even if they decide to withdraw a hefty portion of their returns on their investment.
We must emphasize that this strategy is not the answer to the entire problem or outliving your income in retirement because there is more risk involved with investing in something outside of a fixed income security. The strategy is called dividend income investing and many wealthy people across multiple countries have used it for decades to retire comfortably and yet still increase their wealth without ever having to withdraw their original investments.
How does it work?
Dividend income investing takes advantage of reinvested dividends or (paychecks that are cut to the investor) and utilizes the leverage of compounding interest to increase the next paycheck that is cut to the investor in the future. Dividends have historically outperformed the return of the S & P 500 index annually which is roughly 9%. Even in times of bear markets and in hard economic times, dividends as a whole, have outperformed the markets.
It works because the owner of the shares or the investor is PAID by the company in which they own the shares of that company. So for example, if you owned Exxon Mobil shares, Exxon Mobil will pay you a check for simply owning a share of that company. Normally companies will pay a small percentage to you of the share you own. So to continue with the Exxon Mobil example, if you owned 1 share of Exxon Mobil TODAY, Exxon Mobil would pay you .75 cents on each share you own.
To calculate what your paycheck using Exxon Mobil, let’s use the scenario below.
If you own 500 shares of exxon mobil at 88.00 a share you would take the amount of shares you own (500) and multiply it by .75 cents which is also referred to as the (dividend). 500 X .75 cents = $375.00.
So for owning 500 shares of Exxon Mobil you would receive a paycheck for $375.00 just for owning Exxon Mobil. Now for this example, in order to receive the paycheck, you would have to buy 500 shares at $88.00 per share so your initial investment would have to be $88.00 X 500 = $44,000.00.
$44,000.00 may seem like a lot of money but it pays you $375.00 and to make matters even better, Exxon Mobil doesn’t just pay you once, they will pay you 4 times a year $375.00. At the end of a full year, they would have paid you $1,500.00. That’s roughly a 3.4% return on your initial investment. It’s not a very high return but it doesn’t need to be very high because if you reinvest these paychecks back into the company to buy up more shares, then your paycheck will get bigger next time they cut a paycheck to you for holding their shares because you are owning more shares than what you owned previously. To make things even more exciting in regards to the strategy of using dividends for income in retirement, you can own more than one company too.
So you see the income streams that can be created can be more than enough to fulfill your lifestyle without working in your later years when you are retired. Now you might be wondering what the risk is and we will cover that here later in this article because if you remember earlier we did say that this strategy is NOT the only thing you want to pursue as an investor. There are other strategies or tools you want to combine with this in order to reduce risk of losing money or your initial investment on these paper assets.
For now, just know that the force of compounding is considered to be one of the most powerful forces on earth by guys like John D. Rockefeller and Albert Einstein. Albert Einstein said, “Compounding should be labeled the 8th wonder of the world.”
What’s the risk to income stocks?
The risk and the reality are that any company can go out of business or take a substantial hit to the operation expenses, cash flow, share price, management and many other things that have an impact on the company. This is why if you are using dividend income investing as part of your strategy for receiving income once you have retired, you want to combine it with other income investments that are a much LOWER RISK in nature.
Basically, rule of thumb for picking stocks that offer dividends is that lower yielding dividends such as the 3.4% dividend yield shown in the Exxon Mobil example, are LESS OF A RISK because they aren’t paying out as much of their profits to the shareholders which allow companies to better fund their operation expenses and offer better business fundamentals to their customers. It keeps the company in balance so they can stay in business longer or hedge against bear markets. It is also wise to pick companies that have withstood the test of time and have been paying dividends to shareholders for decades on a regular basis and also offering increases on their dividends.
If you watch the video below I explain the risk that exist in markets as a whole so you can get a better understanding of how companies are impacted by global macroeconomics and you can get a better idea of how to mitigate risk and implement other dividend paying stocks that are a much safer bet rather than investing in individual companies or use a combination of both, stocks that are tied to individual companies and stocks or FUNDS that hold asset classes.
To recap what we have learned as far as mitigating risk remember the main points below.
- Pick companies with lower dividend yields.
- Pick companies that have paid out dividends for decades and have withstood the test of time.
- Combine individual company stocks with stocks that represent a fund that holds asset classes and pays a dividend.
Best Income Stocks
By this point you are starting to understand just what the RISK is for investing and creating a strategy for receiving income in your retirement. The next topic we want to cover in this article is actually listing some of the stocks that we think are some of the best income stocks to choose for receiving income in retirement as well as keeping a portfolio somewhat mitigated when it comes to RISK of losing money. This is just our opinion based on asset allocation and our own judgement of what we want to invest in.
Stocks that we are invested in and are looking at for future investments.
- SPHD – PowerShares Exchange – Traded Fund Trust II
- NOBL – ProShares S & P 500 Dividend Aristocrats ETF
- XOM – Exxon Mobil Corporation
- IEP – Icahn Enterprises LP.
- VIG – Vanguard Dividend Appreciation ETF
- O – Realty Income Corp.
- KO – The Coca-Cola Co.
- VOO – Vanguard S & P 500 Index Fund
- VNQI – Vanguard International Equity Index Funds
These are just a few. There are many others to choose from of course but these are some of the dividend paying stocks that we felt offer good diversification, a mix between some high and low yields and all pay a dividend. We don’t see many of these showing much RISK in regards to falling off the face of the earth any time soon.
WARNING – We want to emphasize that these are our stocks that we hold as shareholders and some of the stocks we have considered or are watching at the moment. These are not stocks that we prefer you invest in without making your own decision first. There is RISK to any investment so it is up to you to do your own research on individual companies and funds that you would like to invest in. www.howtoplaystock.com is not liable for any financial loss that an individual may incur for taking our information and investing exactly into what we invest in.