Planning for retirement can be a difficult process. For example, living within your means can be tough – especially with the cost of living being high. Then, deciding what to do with your spare capital can be challenging at a time when interest rates are relatively low and cash savings offer disappointing after-inflation returns.
As such, now could be a good time to consider buying dividend stocks. They offer higher income returns than cash savings in many cases, while their potential to generate rising dividends could make them even more attractive in the long run. In addition, their scope to deliver capital growth could make a positive impact on your retirement plans.
Despite the global stock market experiencing a bull market which has lasted for over ten years, many shares offer attractive yields at the present time. This may be because of the ongoing risks facing the world economy. The threat of a global trade war and geopolitical risks in the Middle East appear to have caused investors to adopt a cautious attitude towards shares in recent months. As such, there may be relatively high yields on offer across a variety of sectors.
Certainly, dividends are less robust than the income return on cash savings. However, diversifying across a range of stocks could reduce overall risk. And, with the difference in return between cash and dividend stocks being relatively high, income shares could be more attractive on a risk/reward basis.
Dividend growth potential
As well as high income returns, many stocks offer dividend growth potential. This could mean that while dividend shares produce a higher income return than cash today, the gap between the returns of the two assets widens in the coming years. Interest rates could rise at a slow pace, while continued economic growth may lead to many stocks being able to afford higher annual shareholder payouts.
Identifying companies that could deliver dividend growth could mean that investors focus on factors such as their track record of rising shareholder payouts, as well as their financial strength. Furthermore, the headroom a company has when making its dividend payments may provide guidance on whether it can afford to pay a higher proportion of profit as a dividend in future.
Capital return prospects
Alongside the income appeal of dividend shares, the prospect of capital growth could make them even more attractive than cash savings. With interest rates being low, companies that offer a high yield and the prospect of dividend growth may become increasingly popular among investors. This could lead to their shares becoming increasingly in-demand.
Furthermore, the payment of a rising dividend may signal that a company has a solid financial position. It may also convince investors that its management team is confident about its future prospects. This can lead to higher overall returns that improve your chances of building a sizeable nest egg for retirement.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.