Retirement is one of those phases in your life where you start feeling insecure about the loss of regular income. While you are happy to get some well-deserved rest, you start to feel jittery about the unpredictable future. Some of the most common forms of savings that retirees resort to are bonds and bank deposits. However, they offer you very low interest rates and have a long lock-in period. Most of the times, they don’t add value to your investment unless you have invested a really large sum of money. So is there any option to get some quick returns that carry no risk so that retirees can lead a peaceful life? The answer to this is a vociferous “Yes.” Dividend stocks are the magical cure for all your income-related issues post retirement. How will they help you and what should you know while buying dividend stocks? Read through to understand more:
Benefits of dividend stocks
Dividend stocks help you get a reasonable rate of return on your investment within a short span of time. Dividends are usually increased annually; hence with increased dividends, the value of your investment gets higher and higher. You can reap rich profits if you choose the right stocks and invest wisely. You should remember that the stock markets are highly volatile which might affect your dividend stocks too. You should never pool in all your money in these. You should invest only a part in these and use the returns that you get to reinvest in other sources of savings. If you choose the right stocks, you can not only get a steady source of income, but also get coverage against increasing inflation rates.
Point of caution
You should realise that dividends are not the first priority of any company. In fact, it is the last action that the company takes when they have enough free cash at hand after meeting all the operating expenses, paying off salaries to employers, settling supplier dues and other miscellaneous expenses. After these, if the company thinks it will be in a comfortable position after paying out a certain rate to shareholders, only then it declares dividends. When there is a recession or undue fluctuation in the stock market, only the strong ones survive and continue to maintain paying out dividends to shareholders, if not increase the rate.
A classic example is that of General Electric (GE, Financial), the global leaders in the technological and financial services industry. When the stock market was on a high, their performance was also quite strong and their share price traded at close to $40 per share. It also enjoyed a great reputation in the minds of its shareholders as one of the top-dividend payers. When the markets reported a crash and when it was spotted that GE didn’t focus too much on industrial growth as it focused only on its financial services sector, a crisis was triggered which hit the company badly. Dividends were cut down to a great extent, and the share price slumped to less than $10 per share.
Choosing dividend stocks
You must never choose the following kinds of dividend stocks, especially when you are a retiree:
Very high pay-out ratios – Companies that have a pay-out ratio –Â that is anywhere between 70 to 80% and above, are dangerous. This means they pay out almost whatever they earn. Companies that have pay-out ratios of over 100% should be strictly avoided as this means that they pay out more than their earnings. These high ratios are clues that dividends will be slashed big time, anytime in the future.
The example of Worldwide Wrestling Entertainment (WWE, Financial) can be cited to explain this scenario. Right from 2008, the company had a pay-out ratio of close to 182%. During 2011, it could not sustain and had to cut down its dividends by at least $0.67 per share.
You need to follow the stock market carefully and track the announcements and financial history of the companies whose dividend stocks you want to buy. You will find some hidden messages in these numbers that you will never hear directly from the companies. You can take the help of professional consultants as well who will guide you properly so that you can retire happily.
Conclusion
Dividend stocks are the best when it comes to getting a comfortable return on your investments. You will be guaranteed of handsome returns if you choose your stocks properly. You can keep your stocks intact but use the money that you get as dividend to invest in other sources as well. Hence these dividend stocks pave way for you to make additional money. Follow the market closely and let your stocks do the rest.
