On this episode of A Wiser Retirement Podcast, Casey Smith, Matthews Barnett, CFP®, ChFC®, CLU® and Brad Lyons, CFP® talk about a few different dividend investment strategies. They explain what a dividend is, the risks associated with them, and give advice on how to manage them within your portfolio. It is important to understand the different dividend investment strategies so you can choose which one is the best fit for you.
A dividend can be defined as the amount of money paid quarterly by a company to its shareholders. Most of the time, the biggest shareholders for these companies are institutions, pension funds, foundations, endowments, and insurance reserves. Keep in mind that for an individual, dividends act much differently because it takes a very large amount of income to produce an efficient dividend.
As you begin to think through dividend strategies, it is important to understand what a dividend strategy is not. A common misconception is that a dividend strategy is the act of buying a company that pays out a dividend. Instead, a good example of a dividend investment strategy is putting together different sectors of the market to reach your goal. It's also important to have two different strategies: a growth strategy and a high payout strategy. This will help you to better manage dividends within your portfolio and not deplete your principal in retirement.
Start by finding healthy companies to invest in. The biggest factor to look for in a healthy company is if they pay dividends from their net income. An unhealthy company consistently borrows money or uses their retained earnings to pay dividends, which is a sign the company is unsustainable. Another factor to watch for is the percentage of income the company is using to pay the dividend. The lower percentage of net income they need to pay the dividend, the healthier the company is. It is important to look for these qualities because investing in a healthy company can lead to a healthier portfolio.
Dividends are like free cash flow in your portfolio. They can be used for current consumption, or for other investments you may want to make in the future. To be in an equity dividend paying strategy, you are 100% invested in equities which is not a diversified portfolio. In the end, its much more volatile than a 60-40 portfolio. If you’re a retiree looking for a less risky investment, then equities may not be right for you. They tend to be very volatile and unpredictable.
Like most investing, there are risks associated to dividend investing. The three main risks associated to dividend investing are company risk, market risk, and interest rate risk. Because of this, you should tread carefully with investing in dividends and how you implement them in your portfolio. In today’s world, a dividend-only focus is considered to be value focused only. Unfortunately, value focused hasn’t done well in the past decade. Instead, have a diversified portfolio. This can help you set yourself up for financial success in retirement.
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1:57 What is a Dividend?
3:55 or 23:40 Dividend Strategies for a Retiree
7:47 Investing in a Healthy Company
12:00 Equity Dividends in Your Portfolio
29:09 Risks of Dividend Investing
Learn more about Brad Lyons.
Learn more about Matthews Barnett.