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.