Dividends Are Only Part Of A Retirement Income Strategy

We have made a logical progression this week in The Juice. 

On Monday, we covered the degradation — for many — of quality of life in America. 

On Tuesday, we hit a major contributor to this problem — the increased cost of food at and away from home.

On Wednesday, we incorporated reader feedback, part of which pointed out that high interest rates can be good for people in retirement or otherwise living off of their savings. 

In that installment, we touched on one strategy a person with a solid nest egg and no debt — mortgage or otherwise — could execute: 

Part of your money management strategy could be to spread that $500,000 evenly across five certificates of deposit (CDs) with three-month, six-month, nine-month, one-year and 13-month maturities. If each CD earns 5%, at the end of the cycle you will have earned about $27,798 in interest, while preserving your $500,000 original investment. 

That’s called a CD ladder. If you don’t know what a CD ladder — or a CD is — no worries. We have installments planned for June on these and other personal finance and investing basics. 

Anyhow, you’ll get to access chunks of that $27,798 every few months or so.

We are going to devote a good chunk of the summer, starting in June, to covering some basic to intermediate (and extremely useful) personal finance and investing subjects, such as CD ladders. 

One thing we’ll also hit hard are dividends. 

When you receive dividends from a position you can either collect them as cash or reinvest them to buy new shares of stock. As we have noted in the past, dividends — no matter how you use them — don’t always make sense. 

You don’t own Nvidia (NVDA) for its dividend. Most people probably don’t even realize that the company pays a dividend. And nobody that The Juice knows owns NVDA for the 0.02% yield! 

That said, not everybody is looking to own stocks like NVDA, especially if they require reliable income in retirement. 

So there’s a balancing act between how the stock price of a dividend payer performs and what the dividend can do for you. 

It’s a conundrum that’s certainly not one-size-fits all. As we noted in the above-linked installment:

Take General Mills (GIS), the fifth most searched dividend payer right now in Trackstar. Over the last five years, GIS has returned roughly 37%, before you factor in the dividend. Not too shabby. Right now, GIS yields a beefy 3.7% or so. Why? Because the stock’s down about 15% over the last year. (We’ll get to that dynamic in a minute). 

Back to AMZN. It’s up more than 100% over the last five years. Even with dividend reinvestment factored in, GIS doesn’t come close. Just one example of many if we had all day.

But you might say, I don’t care. I can’t risk the volatility in a stock such as Amazon.com (AMZN). I need the relative safety and consistent income from a GIS.

The bigger question here, which we’ll just surface scratch today is what about a stock you like that pays a dividend, but has lagged the market? 

For example, the fifth most searched dividend stock among financial advisors in our Trackstar database, Starbucks (SBUX). 

It has not performed well. SBUX is down nearly 22% over the last year and up only 6% over the last five. That said, you can still make a long-term case for the stock. Maybe we’re stubborn because SBUX was one of the few stock picks we have made in The Juice that hasn’t done well, but we still see a future here. 

Plus, SBUX yields nearly 3% and has a 14-year track record of increasing its now $2.28 annual dividend. 

You would need a $500,000 position in SBUX to generate $15,000 in annual dividend income. For a million reasons this approach makes little sense. If nothing else, you can get more for your money using the CD approach. Or you can lighten your risk, spread your money across equities, including some with better performing stock prices. So you collect some income, maybe reinvest some and watch your principal grow in the process. 

For most of us, dividends will be a way to build our positions and maybe generate a small bit of supplemental income. If you’re lucky enough to have some regular money coming in (work, Social Security, a rental property), interest in high-yield savings (we’ll see for how long savings rates stay this high) and you can generate a few hundred to a few thousand a year via dividend stocks, you’re sitting pretty.

In a case like this, you might be alright holding onto a SBUX if you have long-term conviction. It’s all about your needs and balancing them with risk and reward as both intersect with opportunity. 

The Bottom Line: As always, we’re not going to sit here and say, there’s a right or wrong way. Instead, we’re going to clearly illustrate possible scenarios to give the hamsters running in your head. To get the wheels turning. To give you ideas you can take and adapt to your preferences and financial reality.

One thing that’s probably universal is that most of us will require a multifaceted approach. Without a huge retirement account to draw from, we’ll likely need cash flow from more than one source to ensure we live comfortable lives into retirement and beyond. 

The Juice is here to cover the basics and generate ideas and strategies as they relate to our biggest money concerns: retirement, housing, cost of living and the overall state of the economy.

• Jim Cramer is Recommending These Stocks
• Unlock Daily Stock Gems – FinPro Secrets Spilled!
• 1 Auto Stock Set to Gain from Elon’s Strategic Misfire
• Check Out The Juice’s Favorite ETF Screener