The dividend is money the company gives back to shareholders, and it can be paid out in cash or in additional shares. When a dividend is paid out in cash, the stock price drops by the amount of the dividend dollars per share withdrawn.
But putting the dividend back into the investment (by “reinvesting” it) reacquires the previous invested value plus a few extra free shares for continued compounded growth.
1. You Need the Income
If you’re trying to rely on dividends to fund your retirement, you have a much bigger picture to consider than just the size of the check you receive each quarter. You need to know how much you’ll need in total, which will require honest self-assessment about your spending habits and lifestyle.
One way to help sort out your goal is to use a simple formula to determine how much income you need from your investments to cover your living expenses. This formula assumes that you want to maintain a steady, annual income of $37,522 (the real median single-person income in the United States as of 2021).
You’ll also need to account for inflation. Using this formula and the average annual return of stocks over the past 50 years, you can see how long it will take to reach your goal. This will provide you with a sense of whether or not you’re being conservative in your calculations.정보이용료 현금화 후기
The amount of income you get from your stock portfolio will depend on how much you invest, the types of investments you make and the amount of time you have to wait. Many people who invest for income are drawn to companies that pay dividends, and some investors even choose to focus exclusively on these stocks.
Cash dividends are a small percentage of a company’s profits that it gives to shareholders in the form of cash payments. These payments can be made on a regular basis, like monthly or quarterly. You can choose to keep these payouts in your brokerage account and reinvest them, or you can cash them out to use the money however you wish.
When you reinvest your dividends, they become free shares of the company’s stock that increase your share count without reducing your investment value. These additional shares have the potential to grow in value over time, boosting future returns.
Cashing out your dividends will give you the freedom to spend the money whenever you want, but it’ll cost you the opportunity to grow it into a larger sum through compounding over the long run. Withdrawing your dividends will also subject you to taxes, unless the payments are considered “qualified” and come from U.S.-listed companies that you own in a tax-deferred account like a traditional or Roth IRA.
2. You Don’t Want to Reinvest
A key benefit of reinvesting dividends is that it allows your investment to grow faster than simply pocketing the cash. Companies that pay dividends typically use some of their profit to purchase more assets, which helps them earn even more money in the future and boosts shareholder returns. When you invest your dividends back into the company, it’s a similar snowball effect: You earn more and buy more shares each year, and eventually your stock will be worth more than what you paid to buy it.
However, it isn’t always in your best interest to reinvest your dividends. In some cases, it can make more sense to pocket the cash and put it toward your other financial goals, like paying off debt or funding home improvement projects. Or you can take the cash and then invest it on your own, perhaps using a dollar-cost averaging strategy that invests a fixed amount each week or month instead of just reinvesting the entire dividend payment at once.
Another option is to reinvest your dividends, but only by purchasing additional shares on the open market rather than through a company’s dividend reinvestment plan (DRIP). This can help reduce transaction costs and may allow you to purchase more shares from a variety of different companies, if desired. However, this can be a risky strategy because it doesn’t guarantee the same total return as reinvesting your dividends—and some sectors, such as communication services, have historically yielded lower overall returns than others, such as information technology.
The most important thing to remember is that money is fungible—it doesn’t care where it comes from or where it goes or what kind of account it is in. Ultimately, it is up to you to decide whether or not you want to invest your dividends and, if so, how. A trusted financial advisor can help you fine-tune your investing strategy to meet your specific needs and goals. Find one near you today!
3. You’re Tight on Money
Whether you’re an employee earning the minimum wage or a CEO raking in six figures, everyone feels financially tight at times. If you’re feeling a pinch, it’s a good idea to sit down and take a close look at how your income, spending, and savings all line up. Then you can start working on ways to reduce unnecessary expenses, negotiate your bills, chip away at expensive debt, and build up a financial cushion.
If you’re tempted to cash out your dividends, ask yourself if this is really the best thing for you. If being tight with money is the means to an end – like building up a savings account, paying off a credit card balance, or saving for a big milestone – then it’s worth the sacrifice. But if being tight with money is the end in itself, then it can feel miserable. And that’s no way to live your one precious life!
4. You’re a Retiree
Retirees typically rely on Social Security for much of their income and a healthy investment portfolio to provide the rest. Inflation tends to eat away at the value of savings accounts and bonds, reducing what they can buy each year. Stocks that pay dividends, on the other hand, can help keep up with inflation. By giving investors a fixed payment each quarter, regardless of share prices, these stocks can offer retirees a steady stream of money even as prices rise and fall.
Retiring on dividends is possible if you have enough saved, but it’s important to consider how the decision will impact your overall financial picture. If you rely solely on dividends, your portfolio could run out of cash in less than a decade. In addition, focusing solely on dividend-paying stocks can leave you vulnerable to volatility and market crashes. As you approach retirement, you may want to mix in other asset classes to diversify your portfolio and increase its long-term growth potential.
If you’re not sure where to start, consider a company that offers dividend reinvestment plans (DRIPs). These programs allow you to automatically reinvest your dividend payments into new shares of the company. This is a great way to grow your holdings over time, without having to sell anything or raid your savings account.
Additionally, if you hold your dividend-paying investments in retirement accounts such as IRAs and 401(k)s, you can take advantage of tax breaks. Earnings in these accounts are taxed at the capital gains rate, which is significantly lower than the ordinary income rate.
With a little planning, retiring on dividends is not only possible but can be quite comfortable. Whether you use the money to help with household expenses or to travel, a well-diversified stock portfolio can support your lifestyle during this exciting phase of life. So don’t get too caught up on the 4% rule, and focus instead on enjoying your retirement and crossing items off your bucket list.