How to Fuel Your Retirement with Dividend Cash

Too many people watched the global financial crisis annihilate their 401Ks and pensions. And now, the markets are acting crazy again. Your retirement isn't worth the risk of taking another large-scale hit.

After all, what will you do if your retirement portfolio takes another hit? Depend on social security? How long will that last? And, besides, you didn't work all those years just to scrape by on government handouts.

It's time to protect yourself and your retirement.

You need a way to generate real income, despite the market's volatilty. Dividends are key.

Here's why:

  • Dividends give you instant cash. Any profit from non-paying stocks can only be realized when you sell them.
  • Dividends give you the freedom of choosing where the money goes - into your wallet, into a savings account, or reinvested into the stock itself.

But perhaps most importantly, studies have shown that dividend stocks perform better - and with less volatility - over the long haul than non-dividend-paying stocks.

This is critical to preserve - and grow - your wealth.

With dividend stocks you get the best of both worlds: generating stock income while providing downside protection of your assets.

Read on to find out how to fuel your retirement with the power of dividend cash.

Five Traits of Dynamic Dividend Payers

For a while, dividends were becoming the endangered species of the stock market. An alarming amount of companies reduced, suspended and/or cancelled their payouts during the financial crisis.

To the companies, it might have been a matter of survival. To investors, though, dividends are a good indicator of how a company really feels about their economic outlook.

But, not all dividends are created equal. Things to keep in mind:

1. Seek Growth Companies

Companies can't continue paying out steady and generous dividends if they aren't generating revenue.

Some 23 companies in the energy sector are expected to boost their dividend payouts through the end of the second quarter this year - the most among the 10 groups in the S&P 500. And these companies can expect to continue boosting payouts because there will always be a need for energy.

Take that same perspective when looking at other sectors. Think about which companies are providing goods and services whose demand rarely wanes even in the direst of times. Good examples are food and beverage companies, commodity kingpins and prescription drugs.

2. Look for a Long History of Increasing Yields

Companies with a long history of increasing its yield are almost always a good bet. They may be safe - boring even - but they're reliable.

By nature, decades of paying dividends attracts more investors to a stock. And more investor backing means a wider capacity to expand profitable operations. These companies know they owe much of their success to their investors, and therefore they aren't likely to pull the plug on their dividends.

Investors should look for companies with a consistent track record of paying regular dividends. You're looking for a commitment on the companies' part that gets stronger over time, not vice versa.

3. Don't be Fooled by Very High Yields

Remember, you are seeking stable growth and steady income, not flashy payouts that seem too good to be true.

If a company can't support its dividend, it's only a matter of time until the value of the stock itself falls too.

Case in point, a handful of real estate companies and real estate investment trusts (REITs) confidently paid out yields ranging from 6% to 8%. When the housing boom busted, those dividends were the first to go, leaving investors stranded with depressed dividends - or none at all - on freefalling stocks.

Market-wide, the average dividend yield is 1.8%. Investors should be skeptical of anything more than three times that.

4. Seek Stocks with High Values

A high yield doesn't mean much if the stock isn't worth anything.

For example, if you were only looking for yields, you'd likely find Qualstar Corp's 12.9% yield quite attractive. However, Qualstar stock is valued around the $2 mark. Meanwhile, PepsiCo is paying a 2.89% yield on a stock that's valued around $66 to $67.

With Qualstar, you're getting a per-share dividend of 26 cents. With PepsiCo., you're getting a minimum per-share dividend of $1.90. Plus, you're getting it four times a year. Qualstar hasn't paid its high-yielding divided since November 2009.

All other things being equal, which would you rather have? Pepsi or Qualstar?

5. See the Big Picture

At first, dividend payouts may not add up to much. But when combined with other payouts, and multiplied by the number of payouts your holdings give in a year, you're sitting on a handsome sum of extra money you didn't even have to work for.

If you are reinvesting the dividend back into the companies, the value of your investment is likely to increase even faster.

First, owning more shares means more you're collecting more dividends. Second, the company may have increased the yield - as many dividend-paying stalwarts do - which a higher percentage of cash per share coming your way. And third, stock values of dividend-paying companies are more likely to steadily increase over time, again putting that higher yield to work.

With dividends, time works in your favor. And that's why there isn't a better time to start scooping a piece of dividend-paying companies than right now.

A few dividend plays to get you started

Ready to add dividend cash to your retirement portfolio? Here are a few dividend-paying companies to consider.

ExxonMobil Corp. (NYSE: XOM) recently bumped its dividend up to 44 cents a share from 42 cents. Exxon is a strong choice because it has raised its dividend for 28 consecutive years.

Same goes for its rival Chevron Corp. (NYSE: CVX), which boosted its dividend payout to 72 cents a share. Chevron has now raised its dividend for 23 straight years. The company's stock now yields an impressive 3.5%.

Consumer staple Kellogg Co. (NYSE: K) has paid dividends since 1986. On April 23, the company increased its payout to 40.5 cents per share. Kellogg currently yields about 2.72%.

Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG) are two other consumer staple companies that have a long and strong history of dividend payouts. J&J recently boosted its dividend yield 3.32%. And P&G recently increased its payout to about 48 cents a share. P&G has paid a dividend for 120 consecutive years since its incorporation in 1890. This marks the 54 th consecutive year that the company has increased that dividend.

Finally, International Business Machines Corp. (NYSE: IBM) recently raised its dividend to 65 cents a share from 55 cents a share. Not too shabby.

Together, IBM, Exxon, Procter & Gamble, and Johnson & Johnson account for about 11% of the S&P 500's total dividend yield.

But you can't decide on one, there are dozens of exchange-traded funds (ETFs) whose holdings are comprised of dividend-paying heavyweights, namely iShares Dow Jones Select Dividend Index Fund (NYSE: DVY) Vanguard Dividend Appreciation ETF (NYSE: VIG), SPDR S&P Dividend ETF (NYSE: SDY), and WisdomTree Large Cap Dividend Fund (NYSE: DLN).

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