More on The Dividend Method

When you retire, the question shouldn’t be, “Do I have enough income to live on today?” The key question is, “Will my income keep up with me tomorrow?"

Because the truth is, life isn’t getting any cheaper. Groceries cost (a lot) more these days. Insurance premiums are rising. Travel is getting more expensive. Even little things – the lunch bill, streaming services – tend to creep up year after year.

At an average 3% annual inflation rate, your cost of living will double over the next 24 years. Stretch that into a 30-year retirement and you’ll likely need nearly two-and-a-half times more income at the finish line than on the day you retire. Just to maintain the standard of living you started with.

That’s why it’s not enough just to have enough income to live the way you want in retirement. You need income that increases over time. And that’s where dividends – and what I call The Dividend Method – comes in.

Why dividends?

Dividends aren’t theoretical. They’re not paper profits or projections. Dividends are cash. You either receive them, or you don’t.

When a well-run business declares a dividend, it’s saying, “We earned enough, we have enough, and we’re confident enough in our future to share profits with our owners.” And when those dividends rise, it’s like the companies you invest in are giving you a raise.

For retirees, that’s a powerful concept. It could mean you’re able to live on the income your investments produce, whether share prices rise or not. You’re less dependent on having to sell shares in a down market just to pay the bills.

Living on dividends

Picture this. You’re retired. Social Security is providing a stable base income that rises with inflation. And then, quarter after quarter, those cash dividends start arriving in your investment account.

In the first year, those dividends cover a meaningful slice of your spending. In Year Two, they’re larger. Year Three, larger still. Not because the stock market went up. Not because you jumped in and out of the market. Not because you guessed right. Your retirement income might have increased simply because the companies you own raised their payouts.

That’s what I mean when I say you can potentially live on your dividends. Instead of blindly following a one-size-fits-all strategy like the “4% rule” – that requires systematically liquidating your portfolio and hoping you die before the money runs out – you are living on regular cash payments from businesses that are still growing without having to sell shares to pay your bills. Add that income to your monthly Social Security benefits, and you’ve built yourself a two-part paycheck: steady and rising.

Dividend yield vs. dividend growth

When people discover dividends, they often focus on yield – the rate of return dividends represent based on the purchase price. And yield does matter. But the real secret is whether those dividends increase over time, and by how much.

A 3% dividend that increases by 6% every year will, over time, beat a 6% dividend that never changes. Retirement isn’t a one year repeated thirty times. It’s thirty different years. And unless your retirement income is increasing at or above the rate of inflation you experience, your purchasing power – your standard of living – will be eroding a little every year.

The Dividend Method doesn’t involve chasing the highest dividend-paying stocks. We look for a balance: an above-average yield and the expectation of steadily rising dividends in the future. That’s how you create a retirement paycheck that keeps up with rising prices.

The behavioral bonus

There’s another benefit to dividend investing that doesn’t get talked about enough: rising dividends help you stay the course.

Markets swing, sometimes wildly. Headlines are loud and sometimes scary. But dividends? They’re much calmer. Focusing on daily stock prices is like riding a never-ending roller coaster. Focusing on dividends is more like riding an escalator.

When you focus on your portfolio’s income, not just its value, you might be less tempted to make bad decisions when the market dips. Watch those deposits and see how they’re potentially increasing over time regardless of what the markets do, and you’ll hopefully find it easier to ride out the next pullback – and every one thereafter.

---

Any opinions are those of Brown Family Wealth Advisors and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual results may vary.

While we are familiar with the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Dividends are not guaranteed and must be authorized by the company's board of directors.