Category Archives: Income

Dividends and Income

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“Income and cash flow are the priority in retirement.”

A dividend is a payment made from a company to its shareholders – often quarterly, but sometimes monthly. Dividends are a way for shareholders to participate and share in the growth of the underlying business above and beyond the share price’s appreciation.

Dividends are cash payments made on a per-share basis to investors. For instance, if a company pays a dividend of 20 cents per share, an investor with 100 shares would receive $20 in cash. Stock dividends are a percentage increase in the number of shares owned. If an investor owns 100 shares and the company issues a 10% stock dividend, that investor will have 110 shares after the dividend.

When publicly traded companies have extra cash on hand, it gives the management team some flexibility and options. With some extra cash, they can:

  • Take that money and invest it back in the business – they might do that through expanding existing operations, building factories, possibly acquiring another company that can help them grow.
  • Take that money and buy back shares of its own company – this strategy reduces the number of ways ownership of the company is sliced up, increasing the ownership. or
  • They can pay out some of that money to people who own shares of the company as a way to “share the wealth” and reward them for owning the business (dividend)

Dividends vs. Bonds

Bonds are obligated to pay interest to bondholders on a regular basis, but there’s no obligation for a company to pay dividends. When income from dividend producing assets decline, retirees may realize they don’t have enough cash flow to pay all their expenses. In order to save cash, some non-essential expenses are often cut or eliminated.

Investors who rely on income, especially those in retirement, tend to gravitate to dividend stocks because bonds pay so little. They could be in for a big shock. Many steady dividends payers have said they will cut their dividends (AT&T) or eliminate them completely (Boeing). For people who live off of dividends, a severe cut would significantly affect the amount of money they have to live on.

Additionally, dividends are taxed at the more favorable capital gains tax rates. This can be an important benefit for retirees who likely don’t have a lot of write-offs,

Long-term investors should focus on total return (capital gains plus dividend income) when thinking about how to invest your retirement savings.

Dividends importance to total equity returns over the long term cannot be overstated. Ibbotson Associates data from 1927 to 2002 show that more than 40% of the compound annual growth of its large-cap equity index can be attributed to dividend payouts. That said, the contribution of dividends over shorter periods can exhibit a fair amount of disparity. Indeed, over the decades, it has ranged from a low of about 15% in the 1990s to a high of 71% in the 1970s.

Graphing the difference between ten-year compounded growth rates from dividends and capital appreciation for the years 1947 through 2002, a picture of alternating leadership begins to appear. Clearly, capital appreciation has been dominant in periods of lower inflation and stable interest rates due to the positive impact that it has on price-to-earnings (P/E) multiples. On the other hand, dividends have carried most of the burden of equity market returns in periods of higher inflation and volatile interest rates when P/E multiples were contracting.

Consider all streams of income — Social Security, pensions, IRAs, part-time work — when devising a broader strategy (and tax plan) for your retirement years. Given that “investors using dividend-paying stocks for income must have a strong constitution,” says Richard Steinberg, chief market strategist at The Colony Group.

Dividends are not guaranteed and are paid at the discretion of the board of directors. Unlike a bond, which must pay a contracted amount or be in default, the board of directors can decide to reduce the dividend or even eliminate it at any time.

References:

  1. https://money.usnews.com/investing/investing-101/articles/how-to-live-on-dividend-income
  2. https://money.usnews.com/investing/investing-101/articles/what-are-dividends-and-how-do-they-work

Social Security at 62

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31% of women and 27% of men tapped into Social Security at age 62.

FIDELITY VIEWPOINTS – 07/28/2020 7 MIN READ

You can start collecting your Social Security retirement benefits at any age from 62 to 70, and when you do so affects how big the checks will be. Start earlier, and you’ll receive smaller checks; delay, and you’ll receive bigger ones.

Key takeaways

  • If you claim Social Security at age 62, rather than wait until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits.
  • For every year you delay claiming Social Security past your FRA up to age 70, you get an 8% increase in your benefit. So, if you can afford it, waiting could be the better option.
  • Health status, longevity, and retirement lifestyle are 3 variables that can play a role in your decision when to claim your Social Security benefits.
  • After you reach full retirement age, you have the option of temporarily suspending your benefits. During a suspension you can rack up delayed retirement credits, which will increase your eventual payments.

When it comes to Social Security, it is tempting to take benefits as soon as you’re eligible at age 62. In 2018, 31% of women and 27% of men tapped into Social Security at age 62. After all, these men and women have been paying into the system for all of their working life, and they’re ready to receive their benefits (guaranteed monthly income).

Health status, longevity, and retirement lifestyle

Health status, longevity, and retirement lifestyle are 3 key factors that can play a role in your decision when to claim your Social Security benefits. No one can predict the true impact of these variables, but you can rely on the simple fact that if you claim early versus later, you will likely have lower benefits from Social Security to help fund your retirement over the next 20-30+ years.

The earliest age you can sign up for Social Security is 62, and if you go that route, you’ll permanently shrink your monthly benefit by 25% to 30%, depending on your full retirement age. But in spite of that, it still may pays to sign up for benefits at 62.

One of the best reasons to take Social Security at 62 is if you’ve got a serious illness or chronic medical conditions. As with all retirement planning, you’re acting like an amateur actuary, predicting your own life expectancy to determine how long you’ll need your money to last.

Research shows that the more chronic conditions you have, the shorter your lifespan is likely to be. A 2014 study by researchers at Johns Hopkins University showed that a 67-year-old individual with no chronic conditions will live on average 22.6 years (almost to 90) but that a person of that age with five chronic conditions will live on average 7.7 fewer years than the healthy 67-year-old.

Those chronic conditions included heart disease, cancer, chronic obstructive pulmonary disease, stroke and Alzheimer’s disease. Other common chronic illnesses, according to the Chronic Conditions Data Warehouse, which uses data from Medicare and Medicaid, include hypertension, arthritis, diabetes and kidney disease.

You’ve saved enough that filing early doesn’t matter

If you have more than enough money in your IRA or 401(k) to live comfortably throughout retirement, filing at 62 may not hurt you financially. And, you should consider taking your money and use it to enjoy the early part of your later years. Your benefits could make it possible to travel or do the many things you’ve always dreamed of doing. If claiming Social Security early won’t hurt you in the long run, why not go for it.

Investing your benefits

With investing, there are no guarantees, but if you’re a seasoned investor and are confident in your ability to make a lot of money by putting your Social Security benefits to work, then claiming them at 62 could be a good idea.

Working during retirement

Working during retirement could raise your provisional income, and the higher that income, the more likely you are to have your Social Security benefits taxed. Provisional income is what’s used to determine whether your Social Security benefits will be subject to federal taxes. It’s calculated by taking all of your non-Social Security income and then adding in 50% of your annual benefits. If that total falls between $25,000 and $34,000 and you’re a single tax filer, you could be taxed at the federal level on up to 50% of your Social Security benefits. If it exceeds $34,000, up to 85% of your benefits could be taxed.

The average amount spent in retirement by Americans 65-74 is $55,000 a year. The average Social Security check is $14,000 a year. Only 23 percent of boomers ages 56-61 expect to receive income from a private company pension plan, and only 38 percent of older boomers expect a pension. As for personal savings, most boomers have not saved nearly enough and 45% of boomers have zero savings for retirement.

Change your mind

If you develop filer’s remorse, Social Security gives you 12 months from the date you applied for retirement benefits to change your mind and cancel that initial claim. You’ll have to repay what Social Security has already paid you (and what it has paid your spouse and kids, if they’re collecting family benefits on your record), but this way you can refile later at full retirement age and get your full benefit.

There is one circumstance in which Social Security raises your payment at full retirement age, although probably not to 100 percent of your full benefit. That’s if they withheld some of your benefits during early retirement because you had work income that exceeded Social Security’s earnings limit. In this case, they recalculate your benefit at full retirement age to help you recoup those losses

You Have Minor Children

If you have children, eligible grandchildren, or even a spouse providing care for these children at home, these family members may be eligible for a benefit. Just know you will have to file first before they can receive it!

There’s a rule that states that before benefits can be paid to anyone off of your work record, you have to be receiving benefits. That means filing early could make more sense than waiting.

When combined with your benefits, the benefits to children and your eligible spouse can be up to 180% of your full retirement age benefit. If you have children at home that meet the criteria for eligibility, that’s an obvious reason to consider filing early.

Let’s look at an example to illustrate this.

Say you’re 62 and your wife is 50. You have two children, ages 13 and 11. Thanks to good savings habits throughout your working career, you don’t need Social Security income and can be flexible when you file.

Take into account the benefits paid to your children.

While your children would be eligible for benefits based upon your retirement, the kids cannot get benefits until you file. That means your family would able to collect thousands of dollars more in lifetime benefits if you file early and turn on the benefits for your kids.

File and suspend

Lawmakers made changes to benefits available to Social Security participants who waited until full retirement age to claim benefits. Among them were the repeal of the restricted application or file-as-a-spouse-first strategy and the file-and-suspend strategy. Under a restricted application, those who reached full retirement age could elect to claim only spousal benefits, leaving their own retirement benefits untouched. Similarly, using file and suspend, someone at full retirement age or older could file for benefits but immediately suspend them and still allow a spouse to claim spousal benefits.

As a result of these legal changes, there’s no longer as much incentive for married couples to wait until full retirement age — currently age 66 — to claim their benefits. The thousands of dollars that these couples will no longer be eligible to receive could be enough to push the balance toward claiming earlier rather than waiting.

When to claim Social Security is a tough decision that involves plenty of variables. But even though many financial planners urge their clients to think twice before claiming benefits at the earliest possible age, there are situations where it makes more sense to go ahead and take Social Security at 62 rather than waiting.

References:

  1. https://www.fidelity.com/viewpoints/retirement/social-security-at-62#:~:text=If%20you%20start%20taking%20Social%20Security%20at%20age,FRA.%20Remember%2C%20FRA%20is%20no%20longer%20age%2065.
  2. https://www.fool.com/retirement/2020/10/08/why-working-during-retirement-could-hurt-you-from/
  3. https://www.fool.com/retirement/2020/09/07/3-great-reasons-to-take-social-security-benefits-a/

Passive Income Ideas | Bankrate

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JAMES ROYAL, BANKRATE 8:00 PM ET 5/19/2020

Passive income can be a great supplementary source of funds for many people, and it can prove to be an especially valuable lifeline during a economic recession or during other tough times, such as the government lockdown imposed which has throttled the economy and exponentially increased unemployment in response to the coronavirus pandemic. Passive income can keep some money flowing when you lose a job or otherwise experience some type of financial hardship.

If you’re worried about being able to earn enough to pay essential living expenses or to save enough of your earnings to meet your retirement goals, building wealth and building retirement savings through passive income is a strategy that might appeal to you, too.

What is passive income?

Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.

In practice, passive income does involve some additional effort upfront or labor along the way. It may require you to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing.

Passive income ideas for building wealth

If you’re thinking about creating a passive income stream, check out these strategies and learn what it takes to be successful with them, while also understanding the risks associated with each idea.

1. Selling information products

One popular strategy for passive income is establishing an information product, such as an e-book, or an audio or video course, then the cash from the sales. Courses can be distributed and sold through sites such as Udemy, SkillShare and Coursera.

Opportunity: Information products can deliver an excellent income stream, because you make money easily after the initial outlay of time.

Risk: “It takes a massive amount of effort to create the product,” Tresidder says. “And to make good money from it, it has to be great. There’s no room for trash out there.”

Tresidder says you must build a strong platform, market your products and plan for more products if you want to be successful.

“One product is not a business unless you get really lucky,” Tresidder says. “The best way to sell an existing product is to create more excellent products.”

Once you master the business model, you can generate a good income stream, he says.

2. Rental income

Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect.

If you don’t take the time to learn how to make it a profitable venture, you could lose your investment and then some, says John H. Graves, an Accredited Investment Fiduciary (AIF) and author of “The 7% Solution: You Can Afford a Comfortable Retirement.”

Opportunity: To earn passive income from rental properties, Graves says you must determine three things:

  • How much return you want on the investment.
  • The property’s total costs and expenses.
  • The financial risks of owning the property.

For example, if your goal is to earn $10,000 a year in rental income and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, you’d have to charge $3,133 in monthly rent to reach your goal.

Risk: There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if you’re unable to rent out your property? Any of these factors could put a big dent in your passive income.

3. Affiliate marketing

With affiliate marketing, website owners, social media “influencers” or bloggers promote a third party’s product by including a link to the product on their site or social media account. Amazon might be the most well-known affiliate partner, but eBay, Awin and ShareASale are among the larger names, too.

Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission.

Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you won’t earn anything if you can’t attract readers to your site to click on the link and buy something.

Risk: If you’re just starting out, you’ll have to take time to create content and build traffic.

4. Invest in a high-yield CD

Investing in a high-yield certificate of deposit (CD) at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country. You won’t even have to leave your house to make money.

Opportunity: To make the most of your CD, you’ll want to do a quick search of the nation’s top CD rates. It’s usually much more advantageous to go with an online bank rather than your local bank, because you’ll be able to select the top rate available in the country. And you’ll still enjoy a guaranteed return of principal up to $250,000, if your financial institution is backed by the FDIC.

Risk: As long as your bank is backed by the FDIC, your principal is safe. So investing in a CD is about as safe a return as you can find. Over time, the biggest risk with fixed income investments such as CDs is rising inflation, but that doesn’t appear to be a problem in the near future.

5. Peer-to-peer lending

A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub.

Opportunity: As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of default.

To cut that risk, you need to do two things:

  • Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com, the minimum investment per loan is $25.
  • Analyze historical data on the prospective borrowers to make informed picks.

Risk: It takes time to master the metrics of P2P lending, so it’s not entirely passive. Because you’re investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build income. Economic recessions can also make high-yielding personal loans a more likely candidate for default, too.

6. Dividend stocks

Dividends are payments that companies make to shareholders at regular intervals, usually quarterly. Dividends and compounding may be a strong force in generating investor returns and growing income.

Many stocks offer a dividend, but they’re more typically found among older, more mature companies that have a lesser need for their cash. Dividend stocks are popular among older investors because they produce a regular income, and the best stocks grow that dividend over time, so you can earn more than you would with the fixed payout of a bond, for example.

Shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company. Companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock. Dividends are paid per share of stock, so the more shares you own, the higher your payout.

Investors looking to boost the income generated by their portfolio may want to consider high quality dividend paying stocks. Profitable dividend paying companies have the ability to maintain and even grow dividend payments to their investors. This is demonstrated by the growth in dividends per share paid by the companies in the S&P 500. From 2010 through 2019 the dividends per share paid by the companies in the S&P 500 have more than doubled, a growth rate of nearly 11% per year.

Opportunity: Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks or focusing on a quality dividend investment strategy can be one of the most passive forms of making money.

While dividend stocks tend to be less volatile than growth stocks, don’t assume they won’t rise and fall significantly, especially if the stock market enters a rough period. However, a dividend-paying company is usually more mature and established than a growth company and so it’s generally considered safer. That said, if a dividend-paying company doesn’t earn enough to pay its dividend, it will cut the payout, and its stock may plummet as a result.

Risk: The tricky part is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. “You’ve got to investigate each company’s website and be comfortable with their financial statements,” Graves says. “You should spend two to three weeks investigating each company.”

That said, there are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks.

“ETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds,” Graves says.

Another key risk is that dividend stocks or ETFs can move down significantly in short periods of time, especially during times of economic uncertainty and high market volatility, as in early 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch.

7. Savings or Money Market accounts

It doesn’t get any more passive than putting your money in a savings or money market account at the bank or in a brokerage account offering high yields. Then collect the interest.

Opportunity: Your best bet here is going with an online bank or a brokerage account, since they typically offer the highest rates. Online bank and brokerage account rates can often be higher.

Risk: If you invest in an account insured by the FDIC, you have almost no risk at all up to a $250,000 threshold per account type per bank. However, money market accounts are not FDIC insured. The biggest risk is probably that interest rates tend to fall when the economy weakens, and in this case, you would have to endure lower payouts that potentially don’t earn enough to beat inflation. That means you’ll lose purchasing power over time.

8. REITs

A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate. REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.

Opportunity: You can purchase REITs on the stock market just like any other company or dividend stock. You’ll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time.

Like dividend stocks, individual REITs can be more risky than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks – and you’ll still get a nice payout.

Risk: Just like dividend stocks, you’ll have to be able to pick the good REITs, and that means you’ll need to analyze each of the businesses that you might buy – a time-consuming process. And while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing.

REIT dividends are not protected from tough economic times, either. If the REIT doesn’t generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.

9. A bond ladder

A bond ladder is a series of bonds that mature at different times over a period of years. The staggered maturities allow you to decrease reinvestment risk, which is the risk of tying up your money when bonds offer too-low interest payments.

Opportunity: A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You collect interest payments, and when the bond matures, you “extend the ladder,” rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years and seven years.

In a year, when the first bond matures, you have bonds remaining of two years, four years and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.

Risk: A bond ladder eliminates one of the major risks of buying bonds – the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable.

Bonds come with other risks, too. While Treasury bonds are backed by the federal government, corporate bonds are not, so you could lose your principal. And you’ll want to own many bonds to diversify your risk and eliminate the risk of any single bond hurting your overall portfolio.

Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.

10. Rent out a room in your house

This straightforward strategy takes advantage of space that you’re probably not using anyway and turns it into a money-making opportunity.

Opportunity: You can list your space on any number of websites, such as Airbnb, and set the rental terms yourself. You’ll collect a check for your efforts with minimal extra work, especially if you’re renting to a longer-term tenant.

Risk: You don’t have a lot of financial downside here, though letting strangers stay in your house is a risk that’s atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.

11. Advertise on your car

You may be able to earn some extra money by simply driving your car around town. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If you’re a match with one of their advertisers, the agency will “wrap” your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.

Opportunity: While you do have to get out and drive, if you’re already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.

Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.

How many streams of income should you have?

There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.

“In addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream,” says Greg McBride, CFA, chief financial analyst at Bankrate.

© Copyright 2020 Bankrate, Inc. All rights reserved

Source: https://www.bankrate.com/investing/passive-income-ideas/

References:

  1. https://oshares.com/research-paper-dividend-investing-ousa-ousm/

A Dividend-Growth Investment Strategy

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“Dividend stocks can provide investors with predictable income as well as long-term growth potential.”  Motley Fool

Dividend stocks have faced strong headwinds, including payout cuts and suspensions as efforts to fight the pandemic have hampered corporate cash flows.

Yet, investors who have a moderate risk tolerance should consider pursuing a proven dividend-growth investment strategy for income and return in volatile markets.  In volatile markets, protecting current income becomes more important than ever for investors.  But you also want to satisfy your need for current income and capital growth.

Dividend-paying stocks tend to provide more defensive protection in adverse market environments and they tend to grow over time and protect your real purchasing power. Dividend-paying stocks also tend to have more of a value orientation.

When dividend stocks go up, you make money. When they don’t go up — you still make money (from the dividend). When a dividend stock goes down in price, it’s not all bad news, because the dividend yield (the absolute dividend amount, divided by the stock price) gets richer the more the stock falls in price.

Historically, stocks with rising dividends greatly outpaced the dividend cutters or non-dividend-paying stocks. Further, if you focused on rising-dividend stocks over non-dividend-paying stocks, you would have increased your investment by an average of 4.3% per year over this nearly 48-year study.

pexels-photo-164527

So, a $10,000 investment in non-dividend-paying stocks made at the beginning of this study, growing at an average annual return of 8.57%, would be worth over $500,000 today.

However, the same $10,000 investment in dividend growers over the same period at a 12.87% average annual return would be worth an incredible $3.24 million!

That’s not the only benefit. Returns from dividends have also exhibited a lower standard deviation, or variability, over time. Since the overall volatility of a stock’s total return is typically dominated by its price movements, dividends contribute a component of stability to that total return.

Looking for good dividend-paying stocks

Despite challenging economic times, certain companies have grown their dividends during previous downturns; there may be precedent for their willingness and ability to grow their dividends again.  While much remains uncertain, the highest-quality companies have proven their ability to grow their dividends over time.  They have demonstrated an ability to survive through a range of market environments, even raising dividends during and after previous recessions.

These companies prioritize sustaining dividends in challenging times. They are dividend-paying royalty.  However, it’s advised to avoid stocks with very high yields since they could be prone to dividend cuts or suspensions.  Seek dividend stocks with a fortress balance sheet providing solid cash flow, reasonable dividend payout yield, above average earnings growth and little to no debt.  Avoid companies with heavier debt loads, as measured by net debt (debt minus cash) to earnings-before-interest-taxes-deprecation-and amortization (EBITDA) ratios.

Investors seeking dividend sustainability need look no further than the Dividend Aristocrats: a list of companies within the S&P 500 index that have increased their dividend payouts consecutively for 25 years or more.  The 64 S&P 500 Dividend Aristocrats have raised their dividends in an era that spans the Iraq wars, the Sept. 11 terrorist attacks, the Great Recession, and now the novel coronavirus pandemic.

But while the Dividend Aristocrats list is a great place to start for identifying dividend stalwarts, you are advised to avoid the highest-yielding stocks—some of which can be value traps or worse.  It is okay to look for companies that are paying a decent amount of their earnings back in the form of income, but if the price moves too high and their dividend yield drops, then you’ll sell the stock and capture the gains.

Additionally, under the recently passed 2020 CARES Act, “companies that borrow money from the federal government may not repurchase stock, pay a dividend, or make any other capital distributions until 12 months after the loan is repaid in full,” according to Goldman Sachs.

Investors should always consider their investment objectives, their comfort level and risk tolerance before investing. And, they should keep in the forefront of their mindset that investment plans do not need to change in periods of high volatility since they should be based on five years or longer time horizon.

References:

  1. https://www.fool.com/investing/stock-market/types-of-stocks/dividend-stocks/
  2. https://www.aaiidividendinvesting.com/subscribe/diLP.html?utm_source=facebook&utm_medium=Facebook_Desktop_Feed&utm_campaign=all_leads&utm_content=DI%20Long%20Form%20DCO&adset=di_bundle&fbclid=IwAR1enL0oTxkF5E5phIBVJ1dGk4VYQ_OV6a2RCXNDh-lgeNOFtkxcoXWLJn0

Social Security Age: Claim at 62 or Wait until 70

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“The age you claim Social Security affects your lifetime income.”

Social Security Administration (SSA) payments are based on a calculation of a 35-year average of your lifetime earnings. Each year’s wages are adjusted for inflation before being averaged. If you worked longer than 35 years, the highest 35 years will be used. If you worked fewer than 35 years, SSA will average in zeros for the missing years.

When to collect benefits

According to the Center for Retirement Research at Boston College, 48% of women and 42% of men who claimed Social Security retirement benefits in 2013 did so as soon as they were eligible at age 62.

Yet, according to many financial advisers, baby boomers would be better off waiting until their seventieth (70th) birthday to start claiming Social Security, than if they take benefits in their 60s.

The logic behind this advice is driven by the 8% government-guaranteed increase in lifetime payments for each year baby boomers delay benefits past age 62, up to age 70.

But, baby boomers need to ask themselves what is the likelihood they will live long enough to benefit from the increased payments that start later in life at seventy years old versus collecting benefits at sixty-two years old.

When you decide to delay starting Social Security benefits, you’re betting that you will out-live an actuarially based mortality estimate.

Discount Rate Specification and the Social Security Claiming Decision from the Social Security Administration (SSA) study evaluates Social Security benefits not only as a function of the age of death, but also the probability of reaching that age. It provides that analysis over a range of discount rates.

A general conclusion of the study is that you shouldn’t wait to reach the age of 70 to initiate your Social Security benefits.

Social Security Benefit Breakeven

Before you start drawing on Social Security at age 62, it is recommended that you determine if it maximizes your total payments by calculating the breakeven. Additionally, it’s important that you balance the timing of those benefits with the rest of your retirement income plans. This choice of starting benefits isn’t reversible after 12 months.

Social Security breakeven age occurs when the total value of higher benefits (from postponing retirement) starts to exceed the total value of lower benefits (from choosing early retirement).

  • Example: If you are eligible to collect a reduced $900 benefit at age 62 plus 1 month, and your benefit would increase to $1,251 at age 65 and 10 months, your estimated break-even age is 75 years and 5 months.

https://youtu.be/9e3M3kM9LFk

Early Benefits

Collecting early benefits may pay off despite the reduced monthly check. Since it is impossible to predict how long a baby boomer will live. If you’re facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate.

Just be aware that you will receive a reduced benefit. If your full retirement age is 67 and you begin collecting Social Security at age 62, for example, your benefits are reduced by about 30 percent.

The rational advisors often hear from baby boomers who want to apply for Social Security early benefits at age 62 is that you’ve paid into the system for decades, and want to get something out of it before it goes bankrupt. It might feel like the best decision at the time, but down the road, it may prove the worst decision you ever made in your life.

The legitimate fear for planning purposes is not that you might die early and miss out on some money you could have had from social security, but rather that you will outlive your money.   Think about waiting to collect Social Security as a form of longevity insurance—for you for sure, but also for your surviving spouse if you are the higher earner.  In fact, a higher Social Security benefit is the best deal on longevity insurance you can get.

Benefits reduced if you’re work while receiving benefits

Working after you start receiving retirement benefits may affect your monthly benefit amount, depending on your age and how much you earn. If you are younger than your full retirement age, and your earnings exceed certain dollar amounts, some of your monthly benefit may be withheld.

Social Security will increase your monthly benefit after you reach full retirement age to account for the months of withheld benefits. When you reach your full retirement age, you can work and earn as much as you want and your benefit will not be affected.

Full Retirement Age

Optimum strategy for most baby boomers may or may not be to postpone Social Security benefits at least until you reach full retirement age, which is determined by the Social Security Administration.

Your full retirement age (FRA) is determined by the year you were born. The retirement age used to be 65 for everyone, but is gradually increasing to 67. As the full retirement age goes up, benefits claimed at earlier ages go down.

FRA is 67 for those born in 1960 or later. If you were born in 1937 or earlier, your full retirement age is 65. The FRA rises two months every year after that until it caps out at age 67.

However, collecting Social Security early will cost you. If your full retirement age is 67, your Social Security benefit is reduced by:

  • About 30 percent if you start collecting at 62.
  • About 25 percent if you start collecting at 63.
  • About 20 percent if you start collecting at 64.
  • About 13.3 percent if you start collecting at 65.
  • About 6.7 percent if you start collecting at 66.

If you expect to live beyond the breakeven age, it would be financially worth your while to delay drawing benefits. Yet, there’s not an age that’s appropriate for everyone. Baby boomers must consider their own financial need, health and post-retirement plans before deciding when to begin social security benefits.

There are many ways to collect Social Security benefits. You can collect benefits starting at age 62 or anytime up until you’re 70. Collecting early benefits at age 62 means smaller monthly payouts than waiting until full retirement age or waiting until seventy (70). It’s generally advisable to wait until full retirement age to start collecting Social Security benefits because the monthly benefit is higher than starting early benefits at age 62.

References:

  1. https://crr.bc.edu
  2. https://www.thestreet.com/retirement/social-security-claim-now-or-wait
  3. https://www.bankrate.com/retirement/when-to-take-social-security/
  4. https://www.forbes.com/sites/jlange/2018/10/01/what-is-the-best-age-to-apply-for-social-security/#97e7e9a56d2b
  5. https://www.ssa.gov/benefits/retirement/

Seniors Are Stressed About Income in Retirement. What To Do. – Barron’s

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A large number of American workers closing in on retirement are showing anxiety not just over how much they’ve saved but also over how to manage their different income sources during their post-career lives.

A new study by Charles Schwab found that most pre-retirees—defined as those within five years of retirement—have at least one fear about their income in retirement. The findings were gleaned from a survey last summer of 1,000 Americans aged 55 and older with $100,000 or more in investable assets, half of whom fell into the pre-retiree cohort. 
— Read on www.barrons.com/articles/most-seniors-stress-about-income-in-retirement-heres-what-theyre-most-worried-about-51582977602

Dividends Income Strategy

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“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” John Rockefeller, founder of the Standard Oil Company

For retirees, dividends are a source for cash flow and a great form of income security in their post work years. For smart investors, dividend investments represent one of the closest things they can find to guaranteed income and possible capital appreciation.

John D. Rockefeller, founder of the Standard Oil Company and the world’s first billionaire, was a vocal advocate of dividends. He once commented that, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

Dividend investing provides a steady income stream from the distributions of a company’s earnings to its shareholders. It works well for investors looking for long-term growth and for individuals preparing for or living in retirements who have a lower risk tolerance.

Dividend stocks are companies that pay shareholders a portion of earnings, or dividend, on a regular basis. These payments are funded by profits that a company generates but doesn’t need to retain to reinvest in the business. Dividend stocks are a major factor in the total return of the stock market. About 3,000 U.S. stocks pay a dividend at any given time.

Divdend income investor.

Dividend paying stocks are major sources of consistent income for investors. They can create income and wealth when returns from the equity market are highly volatile or at risk. Essentially, dividend–paying stocks have become an attractive alternative to bonds for investors looking for a reliable stream of investment income.

Companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by providing payouts or sizable yields on a regular basis. If you’re looking to build wealth or generate income, dividend stocks are pretty hard to beat.

Dividend-focused stocks do not offer much price appreciation in strong bull markets. However, they do offer a steady stream of income along with the potential of capital gains. These are the major sources of consistent income for investors to create wealth when returns from the equity market are at risk.

Companies that pay out dividends generally act as a hedge against economic uncertainty or downturns. They tend to provide downside protection by offering payouts or sizable yields on a regular basis.

Dividend stocks offer solid returns in an era of ultralow bond yields and also hold the promise of price appreciation. The S&P 500 index’s yield was recently around 1.9%, about even with that of the 10-year U.S. Treasury note.

Dividends also offer a number of advantages beyond income, one being that qualified dividend income is taxed as a capital gain and at a lower rate than ordinary income receives. The top federal capital-gains tax rate is 23.8%. Payouts can also help buffer volatility in tumultuous markets, providing returns even during a market decline.

Dividend stocks can reduce the amount of volatility or beta in a portfolio. Essentially, dividend investing is boring, and lacks the thrill of a small cap tech stock with exponential revenue growth and avoids the volatility of small caps.

Dividend Payout Date

Getting a regular income from the companies investors own are a testament to their discipline, the health of their business, and their confidence in its future. Companies will announce when their dividend will be paid, the amount of the dividend, and the ex-dividend date. Investors must own the stock by the ex-dividend date to receive the dividend.

The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.

Dividend Payout Ratio

Dividends are typically paid from company earnings, but not all dividends are created equally. If a company pays more in dividends than it earned, then the dividend might become unsustainable. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable.

Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a dividend payout ratio of above 100% is definitely a concern.

Another important check is to see if the free cash flow generated is sufficient to pay the dividend, which suggests dividends will be well covered by cash generated by the business and affordable from a cash perspective.

Still, if the company repeatedly paid a dividend greater than its profits and cash flow, investors should be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

High Dividend Yield

A high dividend yield strategy does have several drawbacks. Those disadvantages include vulnerability to rising interest rates and the potential exposure to financially challenged companies that may have trouble maintaining and growing dividends. Since the stock prices of firms with stable cash flows tend to be more sensitive to fluctuations in interest rates than those with more-volatile cash flow streams.

With lower interest rates and the stock market trading at near all-time highs, the high dividend paying stocks and ETFs could be excellent picks at present. Dividend ETFs provide investors with a diversified portfolio of dividend-paying stocks that allows you to invest and collect income without having to do nearly the amount of research you’d need before buying a large number of the individual components.

Another source of income are preferred stocks. Preferred stocks are known for offering higher dividends than their common stock counterparts. In fact, they can be viewed as a safe haven in case of a market pullback as the S&P 500 is up nearly 24% so far this year.

Stocks with a history of above-average dividend yields typically can be a sign of companies with deteriorating business fundamentals. While that can be the case in certain situations, there are many companies with strong underlying fundamentals that are some of America’s largest and most stable companies.

Bottom line, don’t fall for a high dividend yield in a vacuum. It may not paint an accurate picture of the stock’s potential. Instead, look at the company’s fundamentals and determine how dividend payouts change over time. That may indicate a company’s financially stability. Also, it may illustrate long-term dividend potential.

Dividend-Growth Strategies

An investor should not buy dividend stocks just for the sake of dividends to generate income…they should also be seeking capital appreciation to keep up with inflation and mitigate the risk of the long term loss of buying power of the dollar, as well. The most successful dividend investors seek dividend paying stocks that have the potential to grow their dividend each year.

Dividend payers with a history of dividend growth over a prolonged stretch (10 years’ worth of dividend hikes) tend to be highly profitable, financially healthy businesses. While dividend growers prioritize delivering cash to their shareholders, they’re balancing that against investing in their own businesses. Such firms have often held up better than the broad market, as well as the universe of high-yielding stocks, in periods of economic and market weakness.

During the market downturn from early October 2007 through early March 2009, dividend appreciation stocks, such as Dividend Aristocrats, held up better as a category versus the broad market and versus high dividend yield benchmark.

Dividend-growth strategies also look appealing from the standpoint of inflation protection, in that income-focused investors receive a little “raise” when a company increases its dividend. Dividend-growth stocks will tend to hold up better in a period of rising bond yields than high-yielding stocks. That’s because dividend-growth stocks’ yields are more modest to begin with, so they’re less vulnerable to being swapped out when higher-yielding bonds come online.

The dependability of dividends is a big reason to consider dividends when buying stocks. Not every stock pay a dividend, but a steady, dependable dividend stream can provide a nice boost to a portfolio’s return.

Sources:

  1. https://finance.yahoo.com/news/dividends-capital-gains-differ-195903726.html
  2. https://www.fidelity.com/learning-center/investment-products/stocks/all-about-dividends/why-dividends-matter

Secret to Financial Success

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The secret to financial success is positive cash flow.

Positive cash flow means that you’re earning more than you’re spending monthly. It means your cash inflows exceed your cash outflows.

And, if you have positive cash flow, you have the basis for building and achieving financial success. How you build that financial success depends on your long-term financial goals, personal risk tolerance and your existing lifestyle and habits.

Yet, no matter how wealthy you are or how much you earn in monthly income, you must manage your spending. Many professional athletes and entertainment celebrities have earned millions of dollars of income during a professional career only to file for bankruptcy during their lifetimes due to reckless or undisciplined spending. Consequently, spending matters greatly.

Cash Flow Basics

To accumulate wealth, you must spend less than you earn. This is the fundamental law of money:

[WEALTH] = [WHAT YOU EARN] – [WHAT YOU SPEND]

This law tells us three things about cash flow:

  • If you spend more than you earn, you are losing wealth — a negative cash flow. Negative cash flow is generally an indication that you are living beyond your means and are likely incurring debt.
  • If you spend less than you earn, you are accumulating wealth — a positive cash flow. Positive cash flow may allow for you steps to save, invest or even to pay off debts.
  • If you spend equal to what you earn, you are neither accumulating or losing wealth — a neutral cash flow. Neutral cash flow is spending to the penny exactly what you earn.

Subsequently, the greater the difference or delta between earning and spending, the faster you lose (or accumulate) wealth. And, there are only three things you can do to increase your cash flow: spend less or earn more or do both.

Smart personal finance is very simple. Everything else — paying yourself first, investing ten to twenty percent of what you make, building an emergency fund — is done in support of and dependent on this fundamental law of positive cash flow.

References:

  1. https://farnoosh.tv/?s=Financial+sUccess
  2. https://www.getrichslowly.org/the-power-of-positive-cash-flow/
  3. https://financialwellness.utah.edu/counseling/cash-flow.php