Americans are living longer than ever before. That means retirement nest eggs need to last longer than ever before—and generate a steadily growing income to keep pace with the rising cost of living throughout their retirement years—and to be sustainable in both bull and bear markets.
This is precisely why dividend-paying stocks should be considered as a core component of a retirement portfolio.
The Power To Create Your Personal Pension Plan
How can investors create their own growing income stream for retirement?
Imagine a hypothetical investment—say, a lump sum or a 401(k) rollover of $100,000, with a 3.5 percent annual dividend that consistently increases by 5 percent every year. In this example (see table below) dividends are reinvested and share prices remain the same.
In the first year, an investor would have income of $3,500. But the real work happens in the gradual but steady increase in dividends that well-run, established companies are able to generate over the long term.
• At a 5 percent growth rate, annual dividend income would more than double every nine years.
• In year 10, dividend income is $7,921.
• In year 20, dividend income is $24,972.
• After 20 years, total dividends alone would generate a return on original investment of just under 25 percent.