Dividend cuts have come from both large and small companies across America. Blue chips like Wells Fargo, Boeing, Ford, and others have reduced their dividends. What are retirement income seekers to do? The answer: Consider focusing on total-return investments for income. Total return means both price appreciation and income. When a stock appreciates in price, small slices of it can be sold for income without reducing your principal. But don’t take my word for it – consider what the Wall Street Journal, Financial Times, and CNBC have to say about this strategy:
“One of the most basic principles of finance is that it’s total returns, not dividends, that matter”, the WSJ explains, ”Paying dividends doesn’t benefit investors, because a dividend of $1 simply reduces the stock price by $1—just as withdrawing from an ATM gives you cash in your pocket, but less in the account. It’s true that dividends provide liquidity, allowing shareholders to fund their obligations. But shareholders can simply create liquidity themselves by selling their shares.”
“Why do people want income from equities in the first place? The need to get spending money from your investments once you’re retired is obvious”, this FT article explains, “But why does it have to come from dividends? Surely the right approach is to invest for the maximum total return you can achieve and then redeem whatever units you have to provide for your spending needs.”
Finally, CNBC explains the key takeaway, “Retirees may want to consider structuring their portfolio so their cash flow comes from total returns instead of just income-producing investments.”
As you’ll find in these three articles, there are numerous benefits to getting income from total-return investments. The benefits can include 1) Earning more money from your investments 2) Having more control over when you recognize income and how much, and 3) A lower tax bill than if you received the amount of income only through dividends.
Want to learn how to generate income from a total-return portfolio?
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Jonathan Bird, CFP®
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