Dividend-Paying Stocks
Retirees need to find strategies for generating income from their accumulated savings; even a pension and Social Security together may not be enough to provide sufficient retirement income, especially in the early retirement years.
Many retirees in their 60s in fact find that they spend more money than they ever did during their working years.
True, retirees no longer have commuting expenses, and they don't need to maintain expensive working wardrobes.
But a safari trip to Kenya will quickly eat away whatever you saved by not purchasing a new tailored suit.
The choices you face in searching for income-generating investments are bewildering.
And given the lingering effects of the recession of the late 2000s, many investors are still reluctant to risk their money in the markets.
Annuities are making a strong comeback -- you surrender liquidity, and a sum of cash you'll never see again, for an income stream -- but costs are high and there's little prospect of real growth, even with variable annuities that purport to follow the markets.
(With variable annuities, returns are usually capped.
) A better choice might be a basket of bread-and-butter, dividend-paying stocks.
Dividends represent a portion of annual profits that a company pays out to its shareholders.
Newer companies, or companies that are growing quickly, generally don't pay dividends; they pour all their profits back into the company, whether for growth, acquisitions, research and development, or other activities that will hopefully make the company more valuable in the future.
These companies, often referred to as "growth" companies, can be volatile, but can also offer an investor the prospect of outsized capital gains.
If you purchase the stock of such a company at $25 a share, it may double in value over a short period of time -- giving you the option of selling and pocketing your profit.
Of course, a new-to-market growth company can also fail.
Dividend-paying companies, on the other hand, are usually more established.
They still earmark some of their profits for growth, acquisitions, research, and other activities, but their profits are more predictable, and they can promise a certain dividend to shareholders on an annual basis.
(A company, of course, can always change its policy and vote to stop paying dividends for any reason, but if a longstanding company that has paid an annual dividend for decades were to suddenly stop paying dividends, this would send a confusing message to the markets, and the company's stock value would likely suffer.
) A good example of a company that has transitioned from being a high-growth, no-dividend company to a slower-growth company is Microsoft.
Microsoft rapidly expanded through the 1980s and 1990s as it became an international brand in computer software.
The company generated so much cash over the years that it was unable to efficiently utilize it, even as it continued with extensive research and development.
In 2003, Microsoft paid its first-ever dividend to shareholders, and it continues to pay annual dividends to the present day.
If you own shares of a dividend-paying stock, you can gain in two ways.
First, the dividends represent real cash income.
Owning $20,000 of General Electric stock paying an annual dividend of 3 percent will earn you $600 a year.
This is as steady as bond income -- and, given returns on bonds in the current economy (as of May 2011), at least as lucrative.
Second, you have the prospect of capital gains.
If you had purchased your $20,000 stake in General Electric at $20 a share (giving you 1,000 shares), and the share price rose to $25, your stake would now be worth $25,000.
Even if the share price were to drop, you would still be collecting dividend payments -- so you can afford to wait and sell your stock (if you wish to sell) at the most favorable time.
If you don't need cash income from dividends, most companies offer a dividend reinvestment plan, or "DRIP," in which dividend earnings are automatically used to purchase additional stock.
In the above example, your $600 annual dividend from GE would then not be returned to you in cash, but used to purchase another 30 shares of stock (if the shares were worth $20 on the day of purchase).
Your total holdings in GE would then be 1,030 shares.
And if you're uncomfortable purchasing individual stocks, most mutual fund companies offer funds that invest in income stocks -- stocks that pay dividends.
T.
Rowe Price Equity Income, for instance, is a longstanding fund under stable management that has low costs.
Vanguard Dividend Growth is another choice.
As with individual stocks, you can elect to receive your dividend earnings in cash payouts, or have the earnings reinvested in the funds.
Dividend-paying stocks are a relatively conservative way to earn income on your money, and have a chance at capital growth at the same time.
If you are new in retirement and need to make your money last another twenty-five years or longer, it's worth taking a look at this investment option.
Many retirees in their 60s in fact find that they spend more money than they ever did during their working years.
True, retirees no longer have commuting expenses, and they don't need to maintain expensive working wardrobes.
But a safari trip to Kenya will quickly eat away whatever you saved by not purchasing a new tailored suit.
The choices you face in searching for income-generating investments are bewildering.
And given the lingering effects of the recession of the late 2000s, many investors are still reluctant to risk their money in the markets.
Annuities are making a strong comeback -- you surrender liquidity, and a sum of cash you'll never see again, for an income stream -- but costs are high and there's little prospect of real growth, even with variable annuities that purport to follow the markets.
(With variable annuities, returns are usually capped.
) A better choice might be a basket of bread-and-butter, dividend-paying stocks.
Dividends represent a portion of annual profits that a company pays out to its shareholders.
Newer companies, or companies that are growing quickly, generally don't pay dividends; they pour all their profits back into the company, whether for growth, acquisitions, research and development, or other activities that will hopefully make the company more valuable in the future.
These companies, often referred to as "growth" companies, can be volatile, but can also offer an investor the prospect of outsized capital gains.
If you purchase the stock of such a company at $25 a share, it may double in value over a short period of time -- giving you the option of selling and pocketing your profit.
Of course, a new-to-market growth company can also fail.
Dividend-paying companies, on the other hand, are usually more established.
They still earmark some of their profits for growth, acquisitions, research, and other activities, but their profits are more predictable, and they can promise a certain dividend to shareholders on an annual basis.
(A company, of course, can always change its policy and vote to stop paying dividends for any reason, but if a longstanding company that has paid an annual dividend for decades were to suddenly stop paying dividends, this would send a confusing message to the markets, and the company's stock value would likely suffer.
) A good example of a company that has transitioned from being a high-growth, no-dividend company to a slower-growth company is Microsoft.
Microsoft rapidly expanded through the 1980s and 1990s as it became an international brand in computer software.
The company generated so much cash over the years that it was unable to efficiently utilize it, even as it continued with extensive research and development.
In 2003, Microsoft paid its first-ever dividend to shareholders, and it continues to pay annual dividends to the present day.
If you own shares of a dividend-paying stock, you can gain in two ways.
First, the dividends represent real cash income.
Owning $20,000 of General Electric stock paying an annual dividend of 3 percent will earn you $600 a year.
This is as steady as bond income -- and, given returns on bonds in the current economy (as of May 2011), at least as lucrative.
Second, you have the prospect of capital gains.
If you had purchased your $20,000 stake in General Electric at $20 a share (giving you 1,000 shares), and the share price rose to $25, your stake would now be worth $25,000.
Even if the share price were to drop, you would still be collecting dividend payments -- so you can afford to wait and sell your stock (if you wish to sell) at the most favorable time.
If you don't need cash income from dividends, most companies offer a dividend reinvestment plan, or "DRIP," in which dividend earnings are automatically used to purchase additional stock.
In the above example, your $600 annual dividend from GE would then not be returned to you in cash, but used to purchase another 30 shares of stock (if the shares were worth $20 on the day of purchase).
Your total holdings in GE would then be 1,030 shares.
And if you're uncomfortable purchasing individual stocks, most mutual fund companies offer funds that invest in income stocks -- stocks that pay dividends.
T.
Rowe Price Equity Income, for instance, is a longstanding fund under stable management that has low costs.
Vanguard Dividend Growth is another choice.
As with individual stocks, you can elect to receive your dividend earnings in cash payouts, or have the earnings reinvested in the funds.
Dividend-paying stocks are a relatively conservative way to earn income on your money, and have a chance at capital growth at the same time.
If you are new in retirement and need to make your money last another twenty-five years or longer, it's worth taking a look at this investment option.
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