The history of retirement begins long before investing in dividend stocks was part of most plans. Actually, long before modern humans dominated the earth, even.
Some 50,000 years ago, in the age of woolly mammoths, our Neanderthal ancestors were retiring and living into their mid-40s. Granted, they weren’t sitting on beaches and sipping piña coladas. However, fossil evidence suggests that small groups of Neanderthals cared for their sick, wounded, and elderly.
Fast forward to the Roman Empire, and you find that the Roman army provided pensions to retiring soldiers after 20-25 years of service. And in 1889, Germany instituted an “old-age social insurance program” to assist “those who are disabled from work by age and invalidity.”
Here in the U.S., private pensions first appeared in the late 1800s, followed by the establishment of federal Social Security benefits in 1935. At the same time, the retirement age of 65 was established (although it’s worth noting that life expectancy at that time was about 60 years).
Since then, Congress has passed approximately five million billion hundred laws (not an actual number, but seems like a good guess) regarding Social Security benefits, retirement taxes, retirement plans, IRAs, and so on. The critical points here, however, are that, in 1983, the retirement age rose from 65 to 67. And whereas 46 percent of private-sector workers had pensions in 1980, only 13 percent of today’s private-sector employees participate in a pension plan.
So.... that doesn’t leave many options for those of us who plan/hope to retire someday. One of your best bets is investing in dividend stocks.
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Why investing in dividend stocks needs to be part of your retirement plan
The big problem with most retirement plans is that they are based on saving. Let’s get real for a moment, shall we? You need to stop thinking about saving for retirement and start thinking about investing for retirement.
Saving for retirement is the tired old idea that you spend your working life filling up a bucket of money and then start ladling it out slowly when you retire.
But any money that you have in an actual savings account is pretty much wasted since your rate of return on a bank savings account guarantees that your money will continuously be losing purchasing power as inflation eats away at it (an especially damaging prospect at the moment). If you want to get ahead in a capitalist society, you need to be making capital investments. If your money isn’t working hard for you, it’s just sitting there losing value – hence the importance of investing in dividend stocks for retirement.
Financial advisors will try to tell you that you have to invest a certain way based on your age or your portfolio size … or whatever products they’re selling. But knowing what type of investing you’re best at and most comfortable with is invaluable knowledge. If you’re a round peg, trying to force yourself into a square hole is going to be both counterproductive and costly.
That said, investing in dividend stocks can be a low-risk, steady way to bring regular income into your retirement plan. Dividend stocks aren’t solely dependent on their share price rising or falling. When you buy a dividend stock, you know that you’ll receive a steady stream of income—generally every quarter. If the market crashes and the share price begins to fall, you at least have a nice 3% or 4% yield (or higher) to soften the blow.
What you need to know about dividend stocks
When a company pays a dividend—and especially if it makes an effort to increase that dividend every year—it shows that it cares about rewarding shareholders. Paying a dividend is also a savvy way to attract investors, which is why their share prices typically appreciate over time.
Plus, companies that have the cash flow to pay regular dividends typically make safer, more reliable investments. The best dividend-paying stocks are high-quality, long-lived companies with predictable business models—they aren’t going to suddenly crash due to a lousy quarter or an adverse news event.
Investing in dividend stocks isn’t going to make you rich overnight. But they can significantly build up your nest egg if you buy and hold them for years, or even decades.
As a bonus, you can also participate in dividend reinvestment plans (DRIPs) if you don’t need the income from your dividends. When you choose to reinvest your dividends, each stock’s dividend payment is used to buy new shares of that same stock, at the market rate. You then start earning dividends on those new shares, and those dividends get turned into more shares, and so on. Over time, the number of shares you own and the size of the dividend checks you receive every quarter will both gradually increase, without you doing a thing.
Of course, there are lots of ways to invest for retirement. If you want to be fully prepared, we would like to invite you to look into the Cabot Retirement Club, where you can stay connected to everything about dividend and income investing to ensure your happy retirement. To learn more, click here.
How much do you rely on dividend stocks as part of your retirement plan? Share your thoughts and ideas in the comments below.
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*This post is periodically updated to reflect market conditions.