Once you retire and begin to truly, fully enjoy your “golden years,” the last unpleasant surprise you’ll want to confront is that you cash pile isn’t going to last as long as you had planned.
To hopefully avoid that distress, US News recently offered some tips on generating some extra cash.
“With many savings accounts paying less than 1 percent interest, some retirement savers are turning to dividend stocks to provide a more reasonable return. Dividend stocks provide a stream of income as well as the potential for capital gains, but they also carry more risk than a savings account, certificate of deposit or bonds. Here's what you should know about using dividend stocks to pay for retirement,” David Ning, the founder of MoneyNing.com, writes.
Stop and Go: Dividends Can Be Unpredictable
“Dividends are distributions of company profits to shareholders. You have to be prepared for the possibility of a surprise dividend cut in the future,” he warns.
“It's difficult to make a diversified portfolio of stocks that currently sports a high yield and has the ability to grow its dividend for the foreseeable future. You may have to spend time researching and monitoring these stocks during your retirement years,” he advises.
Slow and Less Volatile
“Dividend stocks tend not to increase as quickly as the market as a whole, but they also tend to hold their value a little better when the market goes down. However, dividend stocks are not a risk-free investment, and carry more risk than high-quality bonds.”
Not as Taxing
“Dividends are typically taxed at a lower rate than bonds or other ordinary income, which makes dividend stocks a tax-efficient source of retirement income. However, when you sell the investment you may also owe capital gain taxes.”
Pass It On
“If you spend only the dividends your investments generate, you will almost certainly leave money behind for heirs. This may be desirable to parents who want to pass on wealth to their children, but it also means that you aren't spending as much as you could in retirement.”
To be sure, other experts advise considering dividends to bolster your retirement income, with Newsmax Finance Insider Charles Sizemore
refining the science.
“We all have bills to pay. And whether it’s your mortgage, your utilities or just that pesky credit card bill, life’s little expenses tend to recur every month,” Sizemore says.
“There’s just one problem with this: If you’re living off of your investments, you normally get paid on a very different timeframe. Dividends are usually paid quarterly, and bond interest is usually paid semi-annually,” he said.
“I don’t know about you, but I don’t like trying to plan my expenses three to six months in advance. And for a retiree, I can’t think of too many things scarier than running out of money in between quarterly dividend payments. Well, fear not. I have a solution: Monthly dividend stocks,” he touts.
“Many closed-end bond funds have traditionally paid their dividends monthly, which is nice. It shows that the managers understand their investors and try to accommodate them. But among everyday dividend stocks, it’s still surprisingly rare and usually limited to a REITs and business development companies.”
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