Baby Boomers Can’t Retire On Dividends Alone — You Will Need to Do This

Once you retire, you may end up getting a lot of your monthly income from Social Security. But those benefits should not be your only income stream by any means.

Many baby boomers recognize the importance of having non-Social Security income. To that end, they make a point of building savings and investment portfolios they can use as needed to cover their expenses and do the things they’ve always wanted.

Dividends have long been recommended by financial experts as a solid retirement investment. But your plan should not be to retire on dividends alone. Here’s why.

You need more protection

Many companies that pay dividends do so consistently. However, the reality is that dividend income is never guaranteed.

When companies issue bonds, there is a contractual obligation to make interest payments. That same obligation does not exist for dividends.

Dividends are a way for companies to share wealth with stockholders. But companies can also choose to reinvest more money in their respective businesses. They can do so by cutting their dividends or, in some cases, eliminating dividend payments completely. For this reason, you cannot rely on dividends alone as a retirement income stream.

Plus, the value of your dividend stocks could decline, taking your portfolio down in the process. Dividend stocks don’t tend to be quite as volatile as growth stocks, but that doesn’t mean they aren’t subject to changes in value.

Generally speaking, bonds tend to be more stable than stocks as a broad asset class, and that extends to dividend stocks. And cash is a whole lot safer than any stock you might hold.

You need diversification

Retiring on dividends alone might seem like a good plan, but it’s important that your portfolio be diversified. The way you set it up should depend on factors that include your income needs and risk tolerance.

In general, on top of dividend stocks, you should aim for your portfolio to include:

• Bonds, which pay guaranteed interest
• Cash, whose value can’t change based on market conditions

In fact, it’s usually a good idea to maintain enough of a cash position in your portfolio to cover one to two years of retirement expenses. That way, if you need to leave your other assets untouched during a stock market downturn, you have that option.

If you’re going to rely heavily on dividends for retirement income, you may want to focus on companies that have steadily increased their dividends over the past few decades. Some of these include:

• Procter & Gamble (PG)
• Coca-Cola (KO)
• Colgate-Palmolive (CL)
• Lowe’s (LOW)
• Consolidated Edison (ED)

Dividend ETFs are also a good option. Some you may want to consider could include:

• The Schwab U.S. Dividend Equity ETF (SCHD)
• The Vanguard High Dividend Yield ETF (VYM)
• The SPDR Portfolio S&P 500 High Dividend ETF (SPYD)

It’s also a good idea to work with a financial advisor to set up a retirement portfolio that’s designed to generate income. An advisor can make specific recommendations based on your income needs and feelings about risk.