Don't Rely Solely on Dividend Stocks for Retirement Income
In a recent interview with Morningstar's director of personal finance and retirement planning, Christine Benz, Susan Dziubinski explores the role of dividend stocks in retirement income. Here's an excerpt from their insightful conversation.
The Appeal of Dividend Stocks
Dividend stocks are a popular choice for retirees seeking stable income. Benz acknowledges the appeal of this strategy, emphasizing the comfort of having a consistent income stream post-retirement. She highlights the financial stability of dividend-paying companies, which often outperform non-dividend-paying counterparts. Historically, these companies have demonstrated less volatility, especially during economic downturns.
However, Benz advises a nuanced approach. While dividend-payers offer stability, she recommends diversifying portfolios with safer investments. Cash and high-quality bonds provide a safety net during market downturns, allowing investors to reinvest dividends into dividend-payers when prices are attractive.
The 2008 financial crisis serves as a reminder that even reliable dividend-payers can cut dividends. Benz suggests protecting against such scenarios by maintaining a balanced portfolio with cash and bonds.
Dividend Growth Strategies
Dziubinski inquires about dividend growth strategies, and Benz recommends exchange-traded funds like Vanguard Dividend Appreciation VIG. These strategies offer stable, high-quality companies with less volatility. However, Benz advises against relying solely on dividend-payers. She suggests including non-dividend-payers, like large-cap tech stocks, to capture market performance.
Benz emphasizes the importance of a total market index alongside dividend strategies to ensure a well-rounded investment approach. This balanced perspective ensures investors can navigate market fluctuations while benefiting from dividend growth.
