3 Reasons to Consider Dividend Kings for Your Retirement Account | personal finance

(Stefon Walters)

All companies that pay dividends are not created equal. While there are some companies that can be said to have reliable dividends, there are others that earn the celebrated title of “King of Dividends.”

If you’re looking for investments that can provide reliable income and have stood the test of time, look no further. Here are three reasons to consider Dividend Kings for your retirement account.

Image source: Getty Images.

1. They have stood the test of time

History has shown us in the stock market that uncertainty is the only sure thing; if you invest long enough, you are likely to run into a market downturn. Dividend Kings earned their title because they managed to increase their annual dividend for at least 50 years in a row. This means that over the past 50 years, these companies have weathered major market downturns, multiple recessions, and other less-than-ideal broader economic conditions.

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When you invest in a Dividend King, you can be almost certain that the company can stay strong in tough times while still managing to maintain its dividends, which is not the case even for some of the most experienced companies. Take walt-disney Y delta airlinesfor example, which suspended their dividends in the midst of the COVID-19 pandemic.

Knowing that your investments will continue to pay dividends is sure to alleviate any anxiety you may have as stock prices fluctuate and fall.

2. They can provide vital income in retirement

With enough time and consistency, a good dividend portfolio can provide substantial income in retirement. If you can save and invest in a fund that returns 8% per year (just below the historical annual return of the S&P 500), here is what you would have accumulated over 30 years with different monthly contribution amounts:

Monthly Contributions account value
$1,000 $1.35 million
$1,250 $1.69 million
$1,500 $2.03 million

Data source: Author’s calculations.

If those amounts were invested in a fund with a 2.5% dividend yield, this is what they would pay annually:

Monthly Contributions account value Annual Dividend Payments
$1,000 $1.35 million $33,750
$1,250 $1.69 million $42,250
$1,500 $2.03 million $50,750

Data source: Author’s calculations.

With those annual dividend payments, you basically receive monthly payments of more than $2,800, $3,500, and $4,200, respectively. Even if those totals aren’t enough to support your current lifestyle in retirement, they’re a valuable supplement to other sources of retirement income, like a 401(k) or Social Security.

3. You won’t have to worry about taxes if they’re in a Roth IRA

In general, how dividend payments are taxed depends on whether it is a qualified dividend or an ordinary dividend. To be considered a qualified dividend, it must come from one of the following:

  • A US company (or a company owned by the US).
  • A foreign company that is eligible for benefits under a US tax treaty.
  • A foreign company that can be listed on a major US stock market.

Investors must also have held the shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Qualified dividends are taxed favorably at your capital gains tax rate, while ordinary dividends are taxed at your regular income tax rate.

Fortunately, if you buy these investments in a Roth IRA, you won’t have to worry about taxes on dividend payments. Since you contribute after-tax money to a Roth IRA, you can receive your withdrawals tax-free when you retire. Growing and compounding your money tax-free can save you tens of thousands in taxes while you’re retired.

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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Walt Disney. The Motley Fool recommends Delta Air Lines and recommends the following options: $145 January 2024 Long Calls at Walt Disney and $155 January 2024 Short Calls at Walt Disney. The Motley Fool has a disclosure policy.

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