Earn $ 300 in Monthly Retirement Dividends in 5 Easy Steps
Generating an income in retirement has been one of the trickiest propositions of the past decade. With extremely low interest rates since the last financial crisis in 2008, the search for yield is more complicated than it was before.
You can’t just put your money in a bond fund and hope for the best. In fact, with bond yields losing to inflation, a heavily bond portfolio will likely lose purchasing power over time and produce negative real returns.
Fortunately, there are alternatives. Here, we’ll go through five easy steps to generate cash flow in retirement while bringing in a little creativity along the way.
1. Raise start-up capital
Unless you are borrowing on margin (which I will not recommend here), you will need to save a reasonable base capital before you can generate a significant amount. and sustainable income stream. The basic calculation for annual dividend payments is:
(Starting balance x Yield on investment dividends) / 12 = Monthly dividends
For example: Suppose a starting balance of $ 120,000 and multiply that amount by 0.03 (for an annual dividend yield of 3%), and you get $ 3,600 per year. Divide that by 12 to get a monthly dividend of $ 300. This is an over-simplified example that can vary depending on the underlying investment and the account in which you choose to hold the investment.
2. Go for ETFs
Exchange Traded Funds (ETFs) are one of the best long-term investment vehicles: they are diversified, generally have low costs, are tax-efficient, and easy to trade. Many high dividend ETFs exist to support investors who want income; that is, they are less concerned with capital appreciation than with cash distributions. ETFs also remove the burden of choosing individual stocks, which can be time consuming and inefficient.
But while we’re at it, why not give yourself the best chance for a total return as well? Even if you are developing an income-oriented portfolio, it makes sense to invest in a basket of companies that have demonstrated price growth as well as a high probability of future growth. Here are some great balanced options:
|ETF symbol||ETF name||Expense ratio||Dividend yield|
|SCHD (NYSEMKT: SCHD)||Schwab U.S. Dividend Equity ETF||0.06%||2.81%|
|VYM (NYSEMKT: VYM)||Vanguard High Dividend ETF||0.06%||2.76%|
|SDY (NYSEMKT: SDY)||S&P SPDR Dividend ETF||0.35%||2.54%|
|NOBL (NYSEMKT: NOBL)||ProShares S&P Dividend Aristocrats ETF||0.35%||1.90%|
|VIG (NYSEMKT: VIG)||Vanguard Dividend Appreciation ETF||0.06%||1.65%|
3. Tax optimization
Taxes are incredibly resilient. You will end up giving a good chunk of your dividend income to the IRS if you carelessly plan your dividend portfolio. Keep the following tax tips in mind when allocating your dividend-paying investments:
- If you keep dividend-paying investments in a tax-deferred account like a 401 (k) or traditional IRA, no tax is charged on receipt of the dividends. It is only when you withdraw money that you are taxed.
- Dividends from a taxable account will be taxed each time they are paid. To avoid this, consider holding investments that rely primarily on growth (such as total equity funds) in your taxable account and investments that rely primarily on income (bond funds or high yield ETFs) in your tax accounts. deferred.
4. Get involved
The longer you hold your investments, the more tax efficient they will be. After one year, the income generated by most investments (with a few exceptions) will be considered “qualified” and eligible for preferential taxation. Qualified dividends get long-term capital gains tax treatment, which can save you a ton of taxes under current law – and possibly even more once new tax regimes are enacted.
Keep in mind that most investment strategies tend to perform better when you commit to them over time. Trading in and out of positions based on recent performance rarely leads to long-term success. Once you’ve decided on an income strategy, your best bet is to put it in place, leave it alone, and allow it to fulfill its goal.
By reinvesting your dividends, you will continually increase your dividend receipts over time. When you reinvest dividends, you are taking the current month’s dividend to buy more shares. This means that when the next dividend payment is due, you will receive more than the last time, because you now own more of the underlying investment. Reinvesting dividends (assuming you don’t need the cash to cover expenses) is an effortless way to increase your cash flow.
Income is only half the story
It’s reasonable to think that people want higher balances in their investment accounts. Remember that dividends (cash distributions) are one form of investment income, but not the only one. At least as important as paying dividends is capital appreciation (capital gains). While you are certainly not wrong to want high dividends, keep an eye on your portfolio’s total return for the best results.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.