3 Reasons to Invest in Dividend-Paying Stocks for Retirement

Here’s something you probably didn’t know: The average monthly Social Security retirement benefit was recently just $1,547, or about $18,500 per year. Yes, if you earned an above-average income during your working life, you’ll likely collect more than that — but it still is probably not going to be enough to cover your expenses in retirement.

Enter dividend-paying stocks, which can supplement your Social Security checks. Here are three good reasons to consider adding some (or many) to your portfolio.

Image source: Getty Images.

1. They deliver income through thick and thin

No matter what the economy is doing — surging, stalling, or falling — healthy dividend-paying companies will keep paying those dividends. So even if we go through a several-year period where your stock holdings hardly grow at all, your brokerage account (or retirement account) will keep receiving installments of cash, for you to do with what you’d like. If you’re retired, you can use that money for food, housing, and other essential or discretionary expenses. If you’re still working, you can reinvest that money into more shares of stock — which may then start generating dividend income of their own!

All this isn’t guaranteed, of course. If a company is struggling, it may eventually resort to reducing, suspending, or eliminating its payout. Many companies have done so, but they all try hard not to. And many suspended dividends do resume once the economic environment improves or the company’s issues are resolved. The vast majority of dividends are rarely or never interrupted.

2. They can help you keep up with inflation

We often forget about inflation, but it can be a silent killer of retirement dreams. It has averaged about 3% annually over long periods, but can be as low as zero or hit double digits in some years. Just experiencing typical inflation rates is enough to cut your purchasing power roughly in half over 30 years, so that something that costs you $100 when you retire will cost you $200 30 years later.

Worse still, while Social Security benefits are adjusted for inflation over time, they generally don’t quite keep up with it, as the measure of inflation used doesn’t reflect retiree spending very well. So be sure to have ways to keep up with inflation, such as by buying dividend payers and perhaps other inflation-fighting investments. Dividend payers are effective because dividend-paying companies tend to increase their payout — if not every year, then every few years. Plenty of companies will increase their payout by more than 5% or even 10% in a given year, and those kinds of hikes are very effective against inflation.

Check out some examples:

Data sources: Yahoo! Finance and author calculations.

Note also that in today’s ultra-low interest rate environment, many savings accounts and CDs and bonds are offering paltry payouts, often well below 1%. You’re going to lose ground and purchasing power if you’re keeping long-term money in any of those these days.

Image source: Getty Images.

3. They can preserve your portfolio

Finally, one more wonderful thing about dividend-paying stocks is that they can help preserve your portfolio. If you have filled your portfolio with non-payers and you need cash, you’ll have to sell off some shares occasionally or frequently. They will be gone, no longer growing in value for you. But if some or many of your stocks are generating meaningful income, you might be able to just tap that income, leaving the shares of stock in place.

Even if you need more income than the dividends are providing, you’ll likely be able to sell fewer shares, preserving more of your invested capital.

For these reasons alone, you should consider adding some solid dividend-paying stocks or dividend-focused funds to your portfolio.