One investment and income strategy that can be useful when it comes to setting yourself up for retirement is one involving dividends. Dividends are regular payouts to shareholders based on the profits of the company. If you own some stock in a company, it’s possible that you will get regular dividends.
Dividends are traditionally distributed quarterly, and scaled based on how many shares you have. So, for example, if a company paid out $1 per share to their investors as a dividend and you owned 5 shares, you would receive $5 as a dividend.
Dividends can be a good way to create a steady income to hedge against inflation and poor investment performance in a retirement strategy. If the companies you invest in offer dividends and the market starts to turn down, you can still count on dividends to provide income. Dividends may also help to offset losses by providing income even in quarters where a company lost value.
Dividend stocks can also be useful to offset more volatile equity stocks. If you have stocks that represent a risk and may fluctuate in value significantly, dividends can help to mitigate some of that risk by providing consistent payouts.
Not all companies offer dividend payments, so if you are thinking about using dividends to set up income during your retirement you need to make sure that the companies you are investing in for your retirement portfolio will actually be paying out dividends.
It is also possible that a company will decide not to pay dividends, even though it has done so in the past. So, while a company that has historically paid dividends may continue to do so, there is always a risk that they suspend, reduce, or cancel its regular dividend payments.
Additionally, dividend values vary from company to company, and if a company is doing poorly, its dividend values may not offset losses from owning its stocks.
Lastly, dividends are often taxed at a much higher rate than capital gains. Generally, when you sell a share of a company, any money you make from that sale is taxed as a “capital gain.” Dividends are taxed as income as if you made the money from a job, and that rate is much higher than the rate for capital gains.
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