Alisa C. from Montgomery, AL asks: Hi Mitch, I’m thinking about committing to a dividend-only approach for getting income from my investment portfolio. If dividend stocks are good performers and they provide cash flow, this seems like a good long-term approach. Appreciate your thoughts, thank you.
Mitch’s Response:
Thank you for sending your question. You are clearly in search of a way to generate solid long-term capital appreciation while generating income for retirement along the way, and I applaud you for thinking about dividend stocks as a means to accomplish your goals. But my advice is to give some more thought to your ‘dividend-only’ approach – it may be wise to try and diversify your income stream.
Don’t get me wrong – I think dividend-paying stocks are a good way to generate cash in an investment portfolio, and as of Q3 2021 our Zacks Dividend Strategy has a yield of 3.13%. But I also believe that just about every investor would benefit from a diversified portfolio, which in the income-generating realm means considering fixed-income, preferred stocks, and even some cash to make sure your income needs are met.
Where Should You Invest Your Retirement?
Are you ready to see how a dividend strategy could fit into your retirement plan? While diversification is key, for a stable and predictable source of income in retirement, we recommend a portfolio also invested in stocks with a strong track record of dividends and dividend growth.
To learn more about how to use dividend-paying stocks in your strategy to potentially generate cash flow for retirement, check out our guide “Retirement’s Uphill Battle: Generating Income in a Low-Interest Rate Environment.”
If you have $500,000+ to invest, get our free Retirement’s Uphill Battle: Generating Income in a Low-Interest Rate Environment1 guide today.
But I would also encourage you to think beyond investing in certain asset classes just because they generate income. Many investors are reluctant to touch the principal in an investment portfolio during retirement, which is understandable. But that same thinking causes many to look only to income-generating assets, like dividend-paying stocks and preferred stocks, when building a retirement portfolio. In reality, however, it is total return that ultimately matters more than yield.
If a broadly diversified portfolio of stocks returns 50% in five years, and a ‘dividend-only’ portfolio returns 30% over the same period but with a 4% annual yield, which portfolio is better? Investors forget that you can ‘create your own dividends’ by strategically trimming shares of stock in a portfolio over time, making sure to keep your overall portfolio diversified in the process.
This strategy requires some active management, but shifting the focus to total return could mean getting the best of both worlds – having parts of the portfolio actively generating income, while other allocations in the portfolio are designed to drive long-term capital appreciation. This strategy could mean having some of the portfolio allocated to a dividend strategy like the one we manage here at Zacks Investment Management, a percentage allocated to fixed income, preferred stocks, and other categories like small- and mid-cap stocks. The point is to have many parts of the portfolio working towards your long-term goals, with a diversified approach also allowing you to potentially reduce risk (versus a dividend-only approach).
To learn more about how to use dividend-paying stocks in your strategy, I recommend checking out our guide “Retirement’s Uphill Battle: Generating Income in a Low-Interest Rate Environment.”2
If you have $500,000+ to invest, get our free guide by clicking on the link below.
Disclosure