Ever since I rolled my 401(k) plan into my current IRA, I’ve been learning more about dividends. One of the funds in my IRA was a dividend reinvestment plan, and over the years I’ve pulled more and more money out of my other funds to place into this one since it fits well with my investing style and risk level.
According to the article entitled, “Dividends make retirement less daunting”, published by USA Today, “Dividends are cash payouts from companies to shareholders. Currently, the average dividend yield of the Standard and Poor’s 500 -stock index is 2.1%. This may not seem like much, but the S&P 500 without dividends would have turned $10,000 into $42,000 in 20 years. With dividends: $61,700.”
Here are a few of the advantages that I’ve discovered when using dividends to help me plan for retirement.
Great for the self-employed and poor saver
I haven’t put dollar one into my retirement account since I left the regular workforce to become self-employed almost seven years ago. This doesn’t however mean that my retirement savings haven’t grown. Due to dividends that are paid out from my retirement fund monthly and then reinvested into the account, I’ve been able to continue to add to my retirement savings even while not having the additional cash to contribute to the fund. This is one reason why dividend funds can be great for people like me or who just have a problem saving a little cash to contribute to savings on a regular basis.
Hedging bets on market performance
When my retirement account goes down due to downward pressures in the stock market, it’s nice to have my regular dividend payout there to make up for some of those losses. While, depending on the month, it this not cover the full extent of those losses, being able to make up a portion of the value my shares have lost can at least make those losses a little easier to bear. Plus, buying additional shares at a lower value adds a sort of silver lining to the whole share price loss situation.
Growing value through dollar cost averaging
Continuing on the theme of buying shares at lower prices, dollar cost averaging can be another benefit of using a dividend reinvestment plan to help with retirement planning. Through regular dividend reinvestment, I’m able to continue to buy shares at a variety of price levels. This means that like an employer-sponsored retirement plan with regular purchases, rather than only buying once or twice a year and chancing hitting a peak rather than a valley in share price, I spread share buying out – sometimes buying at a higher prices, sometimes lower – over multiple price points, thereby dollar cost averaging my share purchases.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.