Data shows that stocks—and particularly dividend-paying stocks—are an important component of an inflation resistant portfolio, even in retirement. Here’s why:
As of this writing, the annual U.S. inflation rate is hovering at about 2%. But that likely understates the real inflation cost experienced by retirees. For example, the cost of health care in retirement—a critical retirement planning consideration—is increasing by an estimated 3.6% per year. That’s nearly twice the average money market rate today. A recent industry study pegs the out-of-pocket cost of health care in retirement for a married couple at more than $285,000.
Without investments in your portfolio that generate the cash to pay those expenses, the steadily increasing cost of health care will eat away at your retirement portfolio.
To preserve your retirement nest egg against the withering effects of inflation, you need to generate an income that increases with health care costs and other costs of living.
That’s why a continued allocation to stocks well into retirement—particularly dividend-paying stocks—is critical: Between 1990 and the end of Q1 2019, the mean annual dividend growth rate in the S&P 500 was 6.01%.
2. Selling Great Dividend Payers
When you own a great stock with a long track record of increasing its dividend, think twice before you sell it. Investors commonly lighten up on stocks to buy bonds and annuities as they approach retirement. And this is understandable. But the best dividend-paying stocks should be thought of differently.
A substantial allocation specific to dividend growth stocks means you need less emphasis on costly annuities to generate a given amount of increasing income.
After all, why overweight annuities for income, when there are literally dozens of dividend-paying stocks with decades-long records that may generate greater income, greater free cash flow and higher returns on capital?
The Dividend Aristocrats is a group of stocks in the S&P 500 that shares the following criteria—they pay a dividend; they have increased their dividend every year for at least 25 consecutive years; they have a minimum market cap of $3 billion. As of this writing, there are 57 of them.