I was supported by the revenue of dividends for all life, but it may require a major initial investment.
The risk that needs to be taken into account includes the possibility of reducing or suspension of dividends and inflation to eradicate the purchasing power of your income.
Possible strategies to reduce this risk include diversifying and investing in stocks and funds with strong records of dividend increases.
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Imagine doing what you like without worrying about money. This is the dream of many Americans. Some achieve this goal of 60 years when they retire. Others can do it even earlier.
One of the most important ways people realize this dream is to invest in dividend campaigns. But can you rely on dividends for life by retiring?
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The concept of life from dividends is simple for life. First you invest the amount of money in shares that pay dividends. Second, you use dividend income to cover your expenses when quitting work. Easy bright? Not necessarily.
First, you will need a essential the amount of money to invest. How much depends on the dividends you invest in salary. Dividend yields are annual dividends per share payable by a company divided by the current share price.
Divide the amount of annual income from dividend yields you expect to earn to calculate how much money you will need to invest. For example, let’s say you want to earn $ 100,000 a year. If you get a 3%dividend yield, you will have to invest about $ 3.33 million. USD ($ 100,000 divided by 3%) to receive this amount. This amount is available to some, but it can be a stretch for many people.
If you want to withdraw from dividend income, but you do not have $ 3.33 million. You have two options to invest. You can first try to get a higher dividend harvest. For example, 5%of dividends will only require $ 2 million. USD invested in $ 100,000 a year. Second, you can try living out of less money. If you could deal with $ 70,000, you will need $ 2.33 million. USD to invest with 3% dividend yields.
However, you need to keep in mind certain risks. One of the big ones that the dividend yield that you get in the future may not be as high as the income originally obtained.
Some companies reduce dividend payments over time. Some even stop or eliminate their dividend programs. For example, going to 2020, Walt Disney Company paid dividends for over 40 years. For the Covid-19 Pandemic, the company has stopped its dividend program for three years.
It is also possible that the company, which has paid the dividend for a long time, will be purchased, so its dividend will be removed. Walgreens Boots Alliance There is a great example. The pharmacy giant stretch was 47 in a row of dividends from 2023. The end of the end. However, Walgreens reduced its dividends in 2024. January
Inflation is, of course, an even greater threat. This can destroy the purchasing power of your dividend income, even if none of the shares you have reduced or stops their dividends.
Good news is that there are potential strategies you can follow to reduce this risk. Probably the most important thing is to diversify your investment. If you have only five shares and one stops your dividends, your income would be reduced by 20%, assuming that all of them pay the same amount. But if you own 25 shares and that will happen, your income would only be 4% lower.
Investing in dividend -oriented fund (ETF) is a great way to diversify. For example, Schwab US DIVIDEND EQUITY ETF(NYSEMKT: SCHD) Has 103 dividends shares. It contains the highest holdings Coca-ColaIs it Verizon CommunicationsIs it Altria GroupIs it Cisco systemsand Lockheed Martin;
Currently, the Schwab US dividend Equity ETF offers approximately 4%dividend yields. This ETF has also been established since its establishment in 2011. October Returned about 12% annual return.
If you want diversification and even higher yields, closed class funds (CEF) could be an alternative. One CEF that belongs to me Cohen & Steers Infrastructure Foundation(NYSE: UTF); This fund is owned by 259 shares. Its distribution yield is high 7.2%. Average CEF annual overall return since its foundation in 2004 March Is 9.5%.
However, there are two main things to pay attention to closed -class funds. Many of them use leverage (borrowing), which increases their risk. The Cohen & Steers Infrastructure Foundation leverage is 28.5%. Their taxes are also usually higher than ETFs.
How can you reduce the risk of inflation? Take a look at the history of dividends for companies and the funds you are under consideration. Just because the company or fund has increased its dividend on average higher than inflation does it mean that it will always do so. However, investing in stocks and funds with strong dividend hiking data may increase the likelihood that your annual dividend revenue is at least not behind inflation.
Finally, regularly evaluate your holdings. Promotions and funds that are great sets today may not be as great sets in a few years. Many Americans can quit their job and rely on dividends for life. However, the sources of those dividends may need to change from time to time.
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Keith Spays holds positions at the Cohen & Steers Infrastructure Foundation and Verizon Communications. Motley fool is a position and recommends Cisco Systems and Walt Disney. Motley fool recommends Lockheed Martin and Verizon Communications. The Motley fool has a disclosure policy.
Can I rely on dividends for life after leaving work? initially released by The Motley Fool
