Stock Dividends for Retirement Income

Now may be a good time to reconsider using dividend stocks to generate retirement income.  The promise of capital appreciation from stocks and mutual funds has been broken for a lot of us.  Income in retirement is what we need.  So how are baby boomers going to find that income, beyond Social Security and (if you are lucky) a pension?

My Logic in Dividend Investing for Retirement

Several years ago, after considerable study and thought, I decided that if we were going to purchase any individual stocks, it would be those that could provide a meaningful and reliable dividend.  By that I mean a steady pattern of increasing dividends and a low to moderate payout ratio.  My logic was that as long as I was earning 4%-5% in dividends based on our initial investment, I would never have to sell the stock in a down market.   Plus in our tax bracket, a 4%-5% dividend yield was not bad, taking into account the lower tax rate on dividends.

So I ended up buying a three bank stocks (WaMu, Citi, and Bank of America), an energy stock (AGL), and two consumer product stocks (Altria and Kraft).  I also bought shares in DVY, a dividend stock ETF.  All met my criteria for dividend paying stocks.  Then I started collecting the dividends.  All went well – for a while.

My Uneven History in Dividend Investing

It wasn’t too long after making these moves that things started to go south.  First, news of WaMu’s troubles surfaced early in 2008 and after analyzing its future, I sold it a loss – none to soon.  Later, Citi and then Bank of America announced that they were cutting their dividends.  Given that I had only purchased these stocks for the dividends, I sold them as well.  Finally, DVY lost 44% of its value in 2008 so that was rather unpleasant and surprising.  Why?  Because historically dividend stocks had outperformed the market overall.  The other stocks have continued to pay their dividends so I still own them, hoping that the worst is over.

Obviously, my plan of buying and holding stocks with a solid dividend history was thwarted by the radical events of 2008, causing financial stocks in particular to do an about face on dividend payouts.  So now I am carefully considering what to do for future income.

Time to Move Back to Dividend Stocks?

It does not make sense to me to stay away from dividend stocks just because of what happened in 2008.  After all, according to data from Standard & Poor’s, it’saristocrat” dividend stocks have returned 44% in the last decade while the S&P index overall lost 9%.  The aristocrat stocks are those that have increased their dividend each year, regardless of market conditions.

It is easy to be fooled by some of the unbelievably high dividend yields available now.  The yields are so high of course because the share prices have dropped so low.  

So where are the best deals now in dividend stocks?  Recently, Smart Money released a short list of dividend stocks that it carefully analyzed.  I like the list.  One of the stocks is Altria, which I already own and which is currently yielding 8.1%.  Another pick is BP, yielding 7.2%.  Even with all of the push to reduce dependence on oil, it will be years before that is felt in the oil industry and either way, the BP dividend is probably secure.

The other Smart Money picks are Vodafone (the world’s largest cell service provider, yielding 6.8%), PPG Industries (paints and other chemicals, yielding 5.0%, and Bristol-Meyers Squibb (pharmaceuticals, yielding 5.6%).  I am tempted to pick up some shares in Bristol-Meyers because health care is going to be a huge part of what the Obama administration will be focused on over the next few years.

For more opinions on dividend stocks for 2009, check out these thoughts from the Dividend Growth Investor blog.

As always, be sure to do your own due diligence on any investing decisions that you make.

Dividends and Taxes

The final wild card in the area of dividend investing is what Congress will do with tax rates.  It is unlikely that the tax rate on dividends will be increased until the current crisis is over.  After that, who knows but I suspect that the Democrats may push for a higher tax rate applicable to taxpayers who are in the upper brackets.  In the end, I believe that retirees will likely benefit from lower tax rates on dividends.   One of Obama’s campaign promises was to put retirees in a position where they would pay no tax on income under $50,000.  With that attitude, surely retirees could keep low tax rates on dividends as well.  Unfortunately, Obama has not yet articulated a clear position on this issue.

So what are your thoughts and plans for the use of dividends to provide retirement income?


  1. says

    Thanks for sharing your experience with dividend paying stocks. We’ve also been hit pretty hard given the stock market dip. Almost all of our individual stocks are dividend paying. I’m definitely going to keep an eye on what some of these companies do with their dividends in the future. We own GE, BAC among many others that are good dividend paying stocks.
    Great post!

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