Relax. You might already have enough money to retire on.
My favorite dividend stocks let people retire comfortably on $500,000 or so.
Got more cash? Great! You’re in elite company.
Fidelity Investments—apparently happy to share its customer’s financial info anonymously—says it has more than 750,000 seven-figure 401(k) and IRA accounts.
That sounds like a lot, but it means less than 1% of Americans have $1 million or more saved for retirement. And that’s OK—select dividend stocks can help us retire comfortably on $500,000 or so.
Sure, a chunk of money is great. Especially when we can leave it untouched and let it grow.
That was no doubt the “secret” of Fidelity’s retirement millionaires. They socked away money for decades and rode the market higher. (They didn’t chase the crypto du jour!)
Soon it will be time to convert the pile of cash into cash flow that can pay the bills. Many retirees buy stocks and “hope” they’ll go up in price. Problem is, hope is not an ideal retirement strategy.
It was dollar-cost averaging that built these retirement fortunes. These investors bought a set amount of stocks and funds every two weeks, every month, every year. They did this systematically, which secured them more shares when prices were low and fewer when they were dear!
Traditional retirement “advice” would say that you can live comfortably doing the exact opposite. Sell 4% per year and hope that you don’t outlive your money.
Wait, what?
This is reverse dollar-cost averaging. It is the inverse of the wealth-building technique that minted these millionaires!
By selling a set dollar amount of shares every month, quarter, or year to pay the bills, these investors are being advised to sell more shares when prices are low and fewer shares when prices are high.
What a disaster.
A better bet? A strategy to retire on dividends alone that leaves that beautiful pile of cash alone.
This is why money manager Tom Jacobs and I wrote the book on this. In How to Retire on Dividends: Earn a Safe 8%, Leave Your Principal Intact, we outline our “no withdrawal” approach to retirement:
- Save a bunch of money. (“Check.”)
- Buy safe dividend stocks with big yields
- Enjoy the income while keeping the original principal intact.
Step number two is a tricky one for many investors. A million bucks is great, but the S&P yields just 1.3% today. A seven-figure nest egg in the popular “low cost” ETF SPDR® S&P 500 (NYSE:SPY) will land you in the low-income bracket with just $13,000 a year.
That will keep your taxes low. And your quality of life!
Blue-chip dividend payers like Johnson & Johnson (NYSE:JNJ) are better, but not by much. JNJ yields 2.4%, so it will dish the millionaire $24,000 in annual income. Or, pay the $500,000 portfolio just $12,000 in yearly dividends. Not enough.
To make that million last, and our working life worthwhile, we really need yields in the 7% to 8% range. We typically don’t see these stocks touted on Bloomberg or CNBC, but they are around.
Of course, there are plenty of landmines in the high yield space. Some of these stocks are cheap for a reason. Which is why we need to be contrarian when looking for income.
We must identify why a yield is incorrectly allowed to be so high. (In other words, we need to figure out why the stock is priced so cheaply!)
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."