As investors set up their retirement accounts, dividend-paying stocks and related exchange traded funds will play a large role in generating income, so that retirees won’t have to dip into their capital.
While they are not the be-all and end-all investment, dividend stocks are a good option to generate income in your Golden Years. Jonathan Clements for MarketWatch points to seven reasons why investors should include dividend-paying equities into their retirement portfolios.
Alternative to bonds. Yields on benchmark 10-year Treasuries have almost doubled since its 2012 bottom and it remains near a three-decade long low. If rates do climb, bond fund investors will see their principle drop.
Diminished risk. Dividend stocks have historically been less volatile than the broader equities market. Although, potential investors should be aware that companies can scale back dividends in times of duress.
Inflation hedge. Stock dividends have outpaced inflation over the long-term, providing retirees with a growing source of income. Over the past 100 years, dividends from diversified collection of U.S. stocks have expanded an average 4.4% per year, outpacing the 3.2% average inflation rate. [Dividend Growth With ETFs]
Dividend-focused ETFs. Instead of browsing through the thousands of stocks available, investors can use dividend ETFs to gain exposure to companies with attractive yields. For instance, the iShares High Dividend ETF (NYSEArca: HDV) has a 3.16% 12-month yield, Vanguard High Dividend Yield ETF (NYSEArca: VYM) has a 2.83% yield and WisdomTree Equity Income Fund (NYSEArca: DHS) has a 3.08% yield. Additionally, there are international options, like the iShares International Select Dividend ETF (NYSEArca: IDV), which has a 4.76% yield, and the WisdomTree DEFA Equity Income Fund (NYSEArca: DTH), which has a 5.21% yield. [To Europe for Dividends]
Tax treatment. Qualified dividends are taxed at the long-term capital gains rate, which means that everyone, except those in the top income bracket, will be paying 15% or less. However, some stock and foreign share dividends are taxed as ordinary income.
Value investing. Dividend stocks are typically characterized as value stocks. Researchers have found that bargain-priced value stocks have outperformed growth stocks over the long-term.
Dividend discipline. Companies are reluctant to cut dividends. Regular dividend payments help keep managers on track and think more carefully on company spending.
For more information on dividends, visit our dividend ETFs category.
Max Chen contributed to this article.