retired couple talking to investor about dividends

How to Use Dividend Income Funds for Your Retirement

As you near retirement you may be weighing your options about how you will supplement your monthly income once you leave your job for good. A dividend income fund is a great retirement strategy that can provide you with a good source of income in retirement. You’ll need investment skills and you’ll need to be willing to spend time managing your retirement portfolio. If that sounds like you, here is an overview of how a dividend income fund can be used for your retirement. 

What are dividends?

If you buy a company’s stock, you become a partial owner of that company. When that company makes a profit, it shares that profit with you in the form of cash payments, shares of stock, or other property. 

Dividends retirement income can increase over the years, helping your income keep up with inflation. A great way to locate stocks that have a history of increasing dividends is to look at the Dividend Aristocrats. 

A dividend income fund owns several dividend paying stocks that will collect the dividends and pay them out to you. Keep in mind, however, that you shouldn’t invest in stocks based on dividends. When a company is in trouble, stocks are likely to have a high yield. If a stock price has decreased, the dividend yield, which is based on the last dividend paid, appears high. A dividend can be lowered by the company at any time, which can also cause a stock price to decrease. 

How often are dividend payments?

Payments will depend on the company, but usually dividends are paid quarterly. When it comes to payments, however, there are some important dates to know:

  • Declaration date: On this date, the company determines their next dividend and when it is payable. 
  • Ex-Dividend date: In order to be granted the dividend from a stock, you have to own the stock on its ex-dividend date. The stock exchanges will set this date. 
  • Payable date: The dividend is paid on this date.  

How are you paid?

Dividends are distributed in a few different ways. The company may send you a check, deposit cash into your bank account, or, if you decided to take part in a dividend reinvestment plan, your dividend is used to purchase more stock shares. 

How do you build dividend income?

Dividend income can be very resourceful for retirees. If you are coming up on retirement, it will be beneficial for you to start building your dividend income now. If possible, try to save back about $1,000 per month. This will help your dividend portfolio to grow. 

Dividend income can grow better than stock market returns as seen by the multiple companies that have increased their dividends to shareholders every year for decades in a row. Adding new capital and reinvesting dividends continually allows your dividend income to build smoothly and even speeds up growth. By the time you retire, you will already have a decent portfolio.