Dividends are a good source of income during retirement. If you reinvest your dividends, you can build a strong portfolio of dividend-paying stocks. Reinvesting dividends means using them to purchase more shares in companies that pay dividends.
The Contribution of Dividends to Total Return
Recently, dividends have constituted a significant portion of total return for investors in stocks. For example, in the 1970s, dividend stocks provided a return of 4.2%. At the same time, price increases produced a return of only 1.6%. In the new millennium, dividends returned 1.8%; stock prices decreased by 2.7%.
What is Dividend Yield?
Dividend yield is the ratio of a company’s annual dividends to its share price at any given time. It is expressed as a percentage. For instance, let’s assume a certain stock is trading at $64. It pays a dividend of 60 cents per quarter. This means the dividend yield for this stock is 3.75%.
What is Earnings Growth?
Another method is to invest in stocks that are increasing their dividends. You can also invest in companies that are expected to grow their earnings. You can use online stock screening tools to find stocks in companies that have increased their dividends.
Just as with a high dividend yield, increasing dividend payouts is not a sure sign that the company will continue to pay dividends in the future. Reality Shares Advisors provides the DIVCON rating for dividend-paying stocks. It estimates the likelihood that dividends will increase or decrease over the next 12 months. The rating system is based on cash flow and earnings, along with other factors.
Disclaimer: The Balance does not provide tax, investment, or financial advice. The information is provided without regard to the investment objectives or risk tolerance of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of losing capital.
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Sources:
The Balance
New York University Stern School of Business
Source: https://www.thebalancemoney.com/how-to-use-dividends-for-retirement-income-2388673
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