Finance 5. Invest for dividends… Dividends are the regularly scheduled payments made to company shareholders based on the profits which a company generates over a given period of time. Typically made by strong, stable businesses that throw off significant cash flow, they’re one of the bread-and-butter sources of income for most retirement portfolios. By focusing on stocks that offer attractive, sustainable and growing dividend yields, it’s possible to build a dividend portfolio that generates significant income, while still maintaining the potential for conservative growth. Because dividends are typically paid quarterly (at least on North American companies; European and Asian companies often have different policies), it also provides a bit of predictability to your income. Some stock market sectors are better known for their dividends than others. Utility stocks, for example, are classic “steady eddie”-type businesses that don’t grow, but return lots of cash to investors in the form of dividends. Banks and telecommunication stocks are other examples. Conversely, technology stocks tend to keep the cash they generate within their businesses, and use it to grow. Keep inmind that investing in individual stocks isn’t the only way to access dividend-paying blue chips. There are a number of exchange-traded funds (ETFs) and mutual funds that specifically target dividend stocks. Some of these also utilize specialized strategies that offer different ways to hone in on particularly promising dividend-paying stocks. If you’re looking for a quick, easy way to add dividends to your portfolio, they’re definitely worth a look. 6. ...but don’t forget about growth Living off of the income from your portfolio while leaving your capital alone is a fine idea in theory. In the real world, however, the strategy comes with consequences. Overloading your portfolio with income-producing bonds and blue-chip, dividend-paying stocks can lead to a highly concentrated portfolio. For that reason, keeping at least a portion of your portfolio in growth-oriented stocks may be as prudent an income-generating strategy as investing for income. True, that income will come from selling portions of your positions from time to time, and that makes your income a little less predictable. On the other hand, one of the great benefits of growth investing is that, usually, such growth stays ahead of inflation – which means that your spending power won’t erode over time. Our point: an “income at all costs” approach misses some other important portfolio considerations, and ignores the potential downside of holding a super-concentrated portfolio. The more prudent approach is something of a balance between income and growth, because both can contribute to your overall income during retirement. 7. Investigate annuities Part of the problem with living off of your investment portfolio is that, unless you invest exclusively in low-yielding GICs, the income isn’t guaranteed. One possible solution to this problem is to purchase an annuity, which can provide an income “foundation” for your retirement years. In the most basic form of annuity, you pay a large lump sum to an issuing company (typically a life insurer). In return, that company provides you with regular income payments for the rest of your life. The exact amount of those payments is based on current interest rates, as well as your age, your gender, certain options which youmay choose (example: if you want annuity payments to continue to your spouse after you die) and, in some cases, whether you have a serious medical condition. The great thing about annuities is how they can guarantee a given level of income, therefore eliminating the need to adjust your spending according to how your portfolio of stocks or bonds may be performing. That’s a significant benefit for retirees who are particularly riskaverse. On the other hand, an annuity requires you to give up control of your capital – in most cases, once you buy one, you can’t get your money back. Of course, there’s no reason why you have to go “all in” on an annuity. Purchasing an annuity with a portion of your retirement capital, while keeping the rest in a traditional stocks/bonds/ cash portfolio can give you the best of both worlds, allowing you to guarantee a basic level of income throughout your retirement, while still keeping a chunk of your savings free to seek out higher returns. If you’re interested in annuities, it’s a good idea to talk to an experienced professional – preferably someone who’s a specialist in helping retirees navigate through the sometimes-complicated product offerings. 8. Get into the rental game One of the traditional ways to save for retirement was to buy property which generated rent. Because rent offers at least some inherent protection against inflation (you can raise rent as the cost of living rises), it was an ideal way for retirees to live off of the income of their retirement portfolios, while leaving their capital intact. Of course, in many parts of the country the rapid rise in real estate prices mean that it’s not so easy to build up a “portfolio” of rental properties. But you could achieve the same goal by renting out a smaller condo or a vacation property, or even your own home if you downsize to something smaller. Or maybe you don’t have to own another property at all. Websites such as Airbnb, VRBO and others offer those with a little extra space in their homes the ability to rent a spare room or a basement suite to tourists, exchange students or visitors to your city. Be aware, however, that certain jurisdictions do have limits and regulations on short-term rentals – check with your municipality to make sure. Full disclosure: like any business, “landlording” takes time, effort and attention to detail. Which means that it’s not for everybody. If you’d rather spend your retirement doing something else, it could make more sense to consider Real Estate Investment Trusts (REITs) as a way to get into the rental game. Such investments offer exposure to a wide variety of real estate focused on specific market segments, sectors of the economy or geographic area. If you’re looking for truly “passive” rental income, look no further. 32 | www.snowbirds.org
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