The role of dividends in a comfortable retirement
A generation expecting to retire with ample wealth faces new worries, says a Canadian advisory, and one clear answer is dividend stocks.
Even retirement isn’t what it used to be.
For generations, people left their jobs at age 65 and got on with the rest of their lives.
By and large, they knew what their incomes from pensions, investments and other sources would be. The chief worry (especially after 1973) was that inflation would eat into that income.
Today, inflation may be the only thing people aren’t anxious about as they contemplate retirement. And that could come back to haunt them, too.
The so-called Baby Boomer generation has seen almost all of the old certainties about retirement weakened, especially in the wake of the worst financial crisis in decades.
Many investment portfolios still have not recovered from the effects of the crisis, pensions are threatened, credit is tight — the worries mount.
Yet the solution to those worries is not really any different than in the past, says an advisory that has seen many Canadians head into retirement over seven decades.
Stick with investments that will bring you income, says The Investment Reporter. That means two different kinds of investments.
One consists of interest-bearing securities. The other, and not the lesser of the two, is dividend-paying stocks.
We’ll take a closer look at the advisory’s prescription for retirement income and consider two of its favourite income stocks.
Four things loom large
When your paycheques stop, your margin for error shrinks. “That’s why the secret of sound investing after you retire is to assume only those risks that are either unavoidable, or commensurate with what you can afford to lose,” says this advisory.
Four things loom large under these new circumstances — the safety of your income, the spectre of inflation, taxes, and your capacity to maintain what you consider a quality lifestyle.
Safety demands high-quality investments, says the advisory. This includes “government-guaranteed interest-producing” securities.
It also means strong, conservative stocks with deep assets. (That includes real estate investment trusts with high stability ratings.)
Safety also calls for prudent investing. Avoid excessive use of margin, says the advisory. The only possible reason to invest with loans from your broker would be “to smooth out cash flow or take advantage of special opportunities that come along from time to time.”
And don’t wait until it’s time for the farewell dinner.
Five years before
Five years before you expect to retire, you should start turning your portfolio into a retirement funding machine.
You can begin by covering your cash needs with interest-bearing investments as an eventual replacement for your pay. Then, you can invest “most of the rest of your money in high-quality, dividend-paying stocks for income and long-term growth.”
And if you set your dividend stocks up in the right rotation, they can be feeding you monthly income along with your interest investments.
Inflation may be on the bottom of the worry list today, but that may not always be the case. One way to hedge against its return, says The Investment Reporter, is to own stocks that raise their dividends regularly.
To minimize taxes, keep your interest-producing investments inside your registered plans — RRSPs or RRIFs. Even though you face taxes on withdrawal, this advisory firmly believes these plans are worthwhile.
While interest is fully taxed, dividends are taxed at a lower rate than ever and capital gains at just half. So keep your Canadian stocks outside your registered plans. And give serious consideration to a Tax-Free Savings Account, if you haven’t already.
Before and after
Can you live the same way after retirement as you did before? Many experts believe you need only about 70 per cent of your pre-retirement income to do so. The advisory thinks this is a bit optimistic.
“In terms of net spending, your lifestyle before and after retirement may be pretty much the same.” Many people spend more on travel, leisure and entertainment after they’re retired. And we must all face the eventual prospect of declining health and rising health care costs.
The best way to support that lifestyle is to keep extra income flowing in. At the risk of being repetitive, the advisory reminds its readers that a steady and rising stream of dividend cheques goes along way toward filling this bill.
There are many stocks that can supply this need, but we will conclude with two favourites The Investment Reporter has just reviewed.
One is pipeline and natural gas firm Enbridge Inc. (TSX-ENB). The advisory likes the fact that the company continues to invest money to grow. And it is keeping its eye firmly on the future, investing in a new wind farm and “Canada’s first fully-integrated carbon capture and storage project,” as well as its oil sands pipeline.
Meanwhile, it keeps raising its dividends regularly and now yields 3.3 per cent on a $1.70 payment. This week it reached a 52-week high at $51.46 and trades today at $50.95.
Reitmans (Canada) Ltd. (TSX-RET.A) has passed through a period of adjustments and flat sales, often due to conditions beyond its control. Yet it came through in solid shape, thanks largely to its large cash reserves and frugal spending habits. Sales are now on the rise.
What’s more, this is one Canadian company that profits from a high loonie, since it buys in American dollars. And with all that cash on hand, its dividends keep on rising. The yield is 4.1 per cent on the $0.80 dividend. This stock, too, hit a 52-week high yesterday at $19.72 and remains there today.
The key to a comfortable retirement, says this advisory, is not just to keep your income intact, but also to keep it rising. In a word, dividends.
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