Paychecks are reassuring. When you’re working, you know that you have a reliable source of income coming into your account — but once you enter retirement, the door to that income stream shuts behind you. Those nearing retirement often struggle to cover the income gap during their golden years and turn to dividend-paying stocks for reliable income.
Is this solution a workable one? Michael and Anthony Pellegrino weigh in.
ANTHONY: A lot of people rely on dividend-producing stocks for income — and in some cases, that strategy checks out. If you’re receiving a 4-5% return on a handful of investments every month, it feels like a stand-in for the income you received during your working life. The problem is that those returns aren’t always consistent. Companies can cut dividends any time they want — and sometimes do so by as much as 70%.
Imagine that for a second. You receive, say, $10,000 every month in dividend returns. Then, seemingly out of nowhere, the dividends drop by three-quarters, and you’re left with a monthly income of just $2,500. That change is going to drastically impact your lifestyle and comfort during retirement!
MICHAEL: It’s important to have a diversified portfolio and not rely on only a few stocks to support you through retirement. Options such as Exchange Traded Funds (ETFs) and mutual funds can provide higher divided stocks and diversification by pooling stocks. There might be a hundred — or even a thousand — stocks in one of those funds! If the dividends for a single stock drops, the impact won’t be nearly as severe as it might if you only had a handful of stocks.
That said, ETFs or mutual funds may not be right for everyone, and you should always consult with a certified fiduciary before making any significant investment decisions. They will be able to help build a plan that takes your goals, financial situation, and income needs into consideration.
ANTHONY: In an ideal world, we would all have pensions that would fund the rest of our lives. Unfortunately, though, those have become more or less a solution of the past; however, there are ways that savers today can create a pension-like plan themselves.
Those of us at Goldstone Financial Group usually don’t recommend annuities, but there are a few evolved versions that offer fantastic solutions to the income gap problem. If a fiduciary recommends it, savers can allocate a portion of their assets into an annuity. This will provide a retiree with a reliable source of monthly income while they also generate higher returns from their other, less predictable financial vehicles.
MICHAEL: Another way that savers might take advantage of high-quality, dividend-paying stocks might be to look into Separately Managed Accounts (SMAs). At Goldstone, we offer SMAs that only include S&P’s top 50 dividend-paying stocks. Each quarter, we rebalance the account by offloading any shares that may have cut their dividends and replacing them with high-paying ones. This approach allows the portfolio manager to shift into a more defensive position and minimize the client’s losses during market corrections.
At Goldstone Financial Group, we have a robust toolbox of solutions that our fiduciaries can use to help clients determine which retirement planning solution are best for their specific needs. If you want to generate income in retirement and aren’t sure which investment vehicles are right for you, consult a Goldstone advisor today!