Dividend Stocks

Investing In Stocks For The Sake Of Cash Flow

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Dividends And Retirement

Posted on | June 5, 2011 | Comments Off

Many investors invest in stocks within accounts specified for retirement.  Dividends indeed can play a major part in funding one’s retirement and compounding dividends or reinvesting dividends can be a great way to build portfolios for retirement.  Upon retirement, stocks can be switched from reinvestment mode to collecting cash from the dividends as a means to fund retirement.

Depending on how many years you have before retiring, your portfolio strategy will definitely change.  If you’re decades away, like I am, then building long-term dividend portfolios over time becomes easier due to the power of compounding.  Compounding is greatly increased when given a lengthy period of time.

If we’re focused on a time in the distant future, such as retirement, we can truly not worry about portfolio performance with regards to stock price.  Stock price can be important with regards to bulk purchases of shares in that you can really boost your returns in the near future and distant future by buying more shares and cheaper prices.  This is because you lock in higher rates of return that will continue to compound.

If you’re focusing on retirement, you may want to emphasize companies that have business models and sell a product that will not be negatively impacted by the macro economic picture.  While it’s impossible to know everything about the future, you can tell which companies may be struggling to stay competitive as innovation and times change.  This stocks should probably be avoided even if they have higher yields than other stocks.  The companies you invest in have to continue to earn money in order to fuel dividends and increasing dividends, so be sure to factor in whether or not the global economic climate is likely to be a tail wind or a head wind.

The last point is that dividend stocks are great within retirement accounts like IRAs which don’t tax dividends.  Your dividends can be fully reinvested.  Rather than taxing dividends or capital gains, you pay taxes on withdrawals during retirement (taxed as income).  For any special situations, be sure to talk with a tax expert or an accountant.