Dividend stocks have become almost trendy in recent years, and it’s easy enough to see why. Two major bear markets in less than a decade destroyed the cult of equities and the belief that, given a decent time horizon, stock prices “always” go up.
Regardless of whether prices “always” go up, you still need income to pay your bills. And dividend stocks can be a big contributor to that income.
There are two basic approaches you take here. You can go for stocks with high yields, such as utilities and slower-growth consumer staples. Or, you can focus on stocks with a modest current yield but a high dividend growth rate. For a stock you intend to hold for a while, the high-growth stock can eventually give you a higher yield on cost than the current high yields.
I wrote a short piece in July that broke down the numbers for some of my favorite income stocks. In 2003, Johnson & Johnson (JNJ) and Walmart (WMT) yielded 1.5% and 0.65% in dividends, respectively. A million dollars invested in each would have paid out $15,296 and $6,538. That stacks up pretty poorly in comparison to the $40,000 you could have received in bond interest by investing in Treasuries.
But let’s fast-forward 10 years. Those original million-dollar investments in Johnson & Johnson and Walmart would be paying you $49,244 and $34,144, respectively, in 2013. Walmart’s total cash payout is still a little lower than the payout from the Treasury note, though it rose by more than a factor of 5 — and will likely keep rising at a blistering pace for the foreseeable future.
Bottom line: You need dividend growth stocks in your retirement portfolio. For a nice “fishing pond” of potential buys, check out the holdings of the Vanguard Dividend Appreciation ETF (VIG). Every holding has raised its dividend for a minimum of 10 consecutive years. Also, InvestorPlace’s Dependable Dividend Stocks have each improved their dividends for a minimum of 25 years.