Dividend growth stocks fuel a retirement savings strategy (2023)

Dividend growth stocks can be an essential part of a retirement savings strategy because they provide a steady stream of income that can be used to increase Social Security and other retirement benefits. Dividend growth stocks not only offer a steady stream of income, but also the potential for capital gains that can help increase the overall value of a retirement account. In this article, we examine the benefits of dividend growth stocks as part of a retirement planning strategy, as well as methods for selecting and managing a portfolio of these stocks.

What are dividend growth stocks?

Dividend growth stocks are issued by companies that have a track record of consistently increasing dividends for shareholders. These companies usually have strong financial positions and a steady stream of earnings that allow them to gradually increase their dividend payout. On the other hand, companies with a high dividend yield but a spotty track record of increasing dividends are likely to need better investments.

Instead of earning a fixed dividend payment over time, an investor could earn increasing income by investing in dividend growth companies. This can be especially helpful for retirees looking for a steady source of income to supplement their Social Security and other retirement benefits.

What is the role of dividend growth stocks in a retirement strategy?

As a reliable source of income that can be used to supplement Social Security and other retirement benefits, dividend growth stocks can be an essential part of a retirement savings strategy. Fixed income investors can preserve their purchasing power and are protected from inflation thanks to the constant increase in dividends. Dividend growth stocks can also have the potential to appreciate over time, increasing the overall value of a retirement portfolio.

Dividend growth stocks can be used in a retirement strategy to supplement bonds or other fixed income investments that would otherwise not provide long term income growth. When a retiree's retirement portfolio includes dividend growth stocks, rather than just bonds and other fixed-income products, they can have a larger and growing income stream.

Since they tend to have minimal correlation with other asset classes such as bonds, dividend growth stocks can also serve as a source of diversity in a retirement portfolio. This can help reduce overall portfolio volatility.

Investing in dividend growth stocks can be a great way to diversify a retirement portfolio of bonds and other fixed income securities, providing a steady stream of income and the opportunity for capital growth.

How retirees can benefit from dividend growth stocks

Dividend income is flexible.

Basically, the connection between flexibility and dividends stems from the fact that dividends transfer money from management's discretion into the hands of investors. Investors who object to how management intends to spend the funds will not be able to "get their money back" through a subsequent equity offering. Dividend payments thus restrict management freedom.

Dividend stocks can be used to hedge against inflation.

Investing in assets that appreciate despite price fluctuations is crucial when inflation starts to rise. Buying dividend stocks, especially stocks with above-average growth rates, can be a powerful tool in the fight against inflation.

Tax Benefits of Dividends

Dividends from stocks and funds are taxable regardless of whether you withdraw or transfer them. Dividends from qualifying investments are subject to a reduced rate of capital gains tax, while non-qualifying investments are subject to a higher standard tax rate. By holding dividend shares in a tax-deferred account, you can reduce or even eliminate your tax burden.

Mutual funds and ETFs offer some diversification versus dividend stocks.

In general, ETFs offer excellent diversity with a low ongoing expense ratio, as many are passive funds that follow a specific benchmark. ETFs have a reputation for being transparent, which is helped by the fact that their holdings (stocks, bonds, etc.) are easy to verify on a daily basis.

How do dividend growth stocks handle inflation?

By providing a steady stream of income that grows over time, dividend growth stocks can fight inflation. The investor's income will increase as the dividends paid for these shares grow. Allowing investors to use rising dividends to buy more goods and services as prices rise helps preserve the purchasing power of their income.

Over time, inflation can reduce the value of fixed-income investments, such as bonds, because fixed-income securities do not appreciate at a rate that keeps pace with price increases. On the other hand, by providing a growing revenue stream, dividend growth stocks can mitigate this effect. As these companies' dividends increase over time, investors' incomes also increase, which helps keep the purchasing power of their income stable.

Furthermore, companies that increase their dividends are financially stable and generate consistent profits. As a result, your share price may increase over time, which can help fight inflation and increase capital growth.

Investment Strategies for Annuity Dividends

It's a common misconception that dividend stocks are just for retirees and risk-averse investors. These stocks can add value to any investor's portfolio over time. But often the momentum of growth dividend stocks is tailored towards retirees and steady-growth investors who prefer lower-risk investments.

Historically, stocks that pay dividends to their owners have offered a higher yield than the industry. Stocks that pay dividends tend to be safer, making them a great addition to a diversified portfolio.

You can use a variety of dividend strategies. The first is to include dividend stocks in your overall investment strategy. Remember that, unlike interest payments on bonds, a company's dividend payments are not required and should not be considered when building a dividend portfolio. The dividend can be threatened if the company has to make budget cuts.

Even if a dividend cut is inevitable, it can be reduced. More important than a company's dividend yield is its ability to sustain dividend growth. Look for a company that thrives in a competitive market and has a solid financial position.

An additional element of a dividend investment plan is dividend reinvestment. Some investors use a tool called a dividend reinvestment plan, or DRIP, to reinvest their dividends. Other investors prefer to do it themselves.

No fees or commissions will be charged to you for using this powerful tool, and any dividend payments you receive can be reinvested in stock in the issuing company. Using this simple set-and-forget method is one of the easiest ways to make time and compounding work for you.

Investing in a mutual fund or exchange-traded fund that focuses on dividends is another approach to earning dividends. These funds allow investors to build diversified portfolios of dividend-paying stocks.

How do you manage a dividend growth stock portfolio?


Diversification is a critical component of managing a dividend growth investment portfolio. Spreading your wealth across multiple stocks, segments and industries helps reduce your overall risk. This can be achieved by investing in a number of different companies, both within the same industry and across industries. It's also crucial to diversify the geographic distribution of the companies you invest in. By diversifying your portfolio, you can increase long-term growth potential and reduce overall risk.


Rebalancing is another important component of maintaining a dividend growth stock portfolio. Rebalancing is the process of bringing the weights of different investments in your portfolio back to their originally intended values. You can do this by selling certain investments that have risen in value and increasing your purchases of those that have fallen. This allows you to diversify your portfolio and ensure your assets align with your overall investment strategy.

Consider overall portfolio allocation to dividend growth stocks.

In addition to diversifying and rebalancing the portfolio, consideration should be given to allocating the overall portfolio to dividend growth stocks. In general, you should have a variety of investments in your portfolio, e.g. B. Bonds, stocks and cash. Your investment objectives, risk tolerance and time horizon should all be considered when deciding how much money to allocate to dividend growth stocks. If you are approaching retirement and want a reliable source of income, it is better to have a higher proportion of dividend growth stocks. A lower ratio might be better if you're younger and have a longer time horizon.

Common mistakes made by dividend growth stocks

don't pay taxes

Taxes are easy to forget, costing thousands of dollars worth of assets that would otherwise be adequate dividend investments. You have to pay taxes on the dividends you earn if you hold your dividend shares in a standard brokerage account. Your tax rate depends on how much money you earn and can range from 0% to 20% if your dividends are within the limits of what is considered "eligible". The average rate for individuals is 15%.

Even value stocks can be risky.

The stock market has many moving elements, and only a professionally trained stock analyst can attempt to predict which companies will prosper and which will fail over the long term. People don't wait for the US government to default on its debts, so US Treasuries are often seen as "risk free" assets.

Remember that higher returns are not always better.

Buying a dividend stock just because of its high yield is one of the most common mistakes investors make. A stock's dividend yield is only a small part of the big picture that investors need to consider. More specifically, you need to decide whether a high dividend yield is because the stock is cheap or because the company is struggling.

Determining the correct asset allocation can take some time.

What's the best way to separate investments into those that pay dividends and those that act as a hedge against market volatility? Unfortunately, that depends on how risk tolerant you are. A company's ability to pay dividends is not guaranteed. They may change or even abandon their dividend payment practices.

final result

In short, dividend growth stocks are like the trusty grandfather of your retirement portfolio, providing a steady stream of income you can always count on, even when the market is exploding into a frenzy. These stocks are the ideal blend of sugar and spice as they offer the potential for capital appreciation and help to hedge against inflation. So if you want to enjoy your senior year and retire in style, consider adding some dividend growth stocks to your portfolio. After all, who doesn't appreciate a little extra money to spend on that luxurious yacht or private island you've always wanted?

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Author: Terence Hammes MD

Last Updated: 02/18/2023

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