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What Dividends Can (And Can’t) Do for Your Retirement

What Dividends Can (And Can’t) Do for Your Retirement Fitzwilliams Financial

One investment strategy that can be useful when it comes to setting yourself up for retirement is dividends. Dividends are regular payouts to shareholders based on the profits of the company. If you own some stock in a company, it’s possible that you will get regular dividends.[1]

Dividends are traditionally distributed quarterly, and they scale with how much stock you have in a company. So, for example, if a company paid out $1 per share to their investors as a dividend and you owned 5 shares, you would receive $5 as a dividend.[2]

Advantages of Dividends

Dividends can be a good way to create a steady income to hedge against inflation and poor investment performance in a retirement plan.[3] If the companies you invest in offer dividends and the market starts to turn down, you can still count on dividends to provide income. Dividends may also help to offset losses by providing income even in quarters where a company lost value.

Dividend stocks can also be useful to offset more volatile equity stocks.[4] If you have stocks that represent a risk and may fluctuate in value significantly, dividends can help to mitigate some of that risk by providing consistent payouts.

Disadvantages of Dividends

Not all companies offer dividend payments, so if you are thinking about using dividends as a way to set up income during your retirement, you need to make sure that the companies you are investing in for your retirement portfolio will actually be paying out dividends.

It is also possible that a company will decide not to pay out dividends, even though it has done so in the past. So while a company that has historically paid dividends may continue to do so, there is always a risk that they suspend, reduce, or cancel their regular dividend payments.[5]

Additionally, dividend values vary from company to company, and if a company is doing poorly, its dividend values may not offset losses from owning its stocks.

Lastly, dividends are often taxed at a much higher rate than capital gains.[6] Generally, when you sell a share of a company, any money you make from that sale is taxed as a “capital gain.” Dividends are taxed as income as if you made the money from a job, and that rate is much higher than the rate for capital gains.

The Takeaway

If you’re not sure if you should add dividends to your financial plan, contact us today for a complimentary review of your retirement strategies.

When consumer confidence hits a multi-decade low, it is completely natural for you to feel a sense of hesitation about your hard-earned savings. If you are approaching retirement, seeing prices rise while trying to figure out the right time to adjust your portfolio can feel incredibly stressful. However, this low confidence might actually be introducing a healthy dose of critical thinking into the market right now. Instead of rushing into investments out of a fear of missing out, I am seeing people take their time to analyze their moves before they act.

This deliberate pace could be a vital asset as we prepare for what might be a historic three trillion dollar wave of tech IPOs. The names hitting the market are incredibly popular, and the media hype may make you feel like you need to change your entire strategy to get a piece of the action. But we must look closely at the underlying reality: many of these massive firms are not yet profitable. The typical corporate fundamentals simply are not there yet.

Because of this, I believe you should treat these speculative assets with extreme caution, much like money you would take to Vegas. If you want to participate, you might consider limiting that exposure to no more than five percent of a well-diversified portfolio. You should never dismantle a carefully crafted, long-term retirement plan just to follow a market trend. Furthermore, you must realize that extreme trading volumes during these public launches could cause your orders to execute at vastly different prices than you originally intended. It pays to be patient and let the dust settle.

If you have questions about how these shifting market dynamics might apply to your personal retirement plan, our team is always here to help.

Key Takeaways

  • A drop in consumer confidence may encourage a healthier investment environment by forcing individuals to rely on critical thinking instead of emotion.
  • An upcoming wave of massive technology IPOs might generate significant media hype, but these companies may lack current profitability and traditional business fundamentals.
  • Investors should avoid allocating more than five percent of a diversified portfolio to highly speculative, unproven market assets.
  • Heavy trading volume during a major public offering could cause investment orders to execute differently than an investor expects.

Fitzwilliams Wealth Management, Inc. is an SEC registered investment adviser. FWM and Fitzwilliams Financial are affiliated companies. This content is for informational purposes only and should not be construed as personalized investment advice. We do not provide tax or legal advice. Investing involves risk. Media appearances are for informational purposes only and do not constitute an endorsement.
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