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How Will You Replace Your Income in Retirement?

Today, most retirement investors have saved through an Employer Retirement Plan, usually a 401(k). 401(k)'s are great for building a nest egg in your working years, but when it comes time for living off that nest egg, how do you go about it? Traditional portfolio management theory would point to the “4 Percent Rule”, which states you can safely withdraw 4 percent of your portfolio per year and have it last 30 years without depleting your principal. The reality is, this rule doesn't apply to everyone. You may even require a much larger amount than 4% to live on in retirement, especially in your "Go-Go" years where enhanced living expenses, such as traveling, are highly important to you.

Far too many investors view risk as the day-to-day volatility of their portfolio. While this is true, it's also important to pay attention to the other risk that sometimes goes unnoticed- Longevity Risk (a.k.a. out living your money in retirement). Stocks have a higher historical return than bonds and provide you with a greater chance of Living your Good Life, if you can tolerate the added price volatility.

What if instead of relying on the price return of the stock market we focused on the dividend return of companies that have a strong track-record of growing dividend payments?

At its core, a dividend is a distribution of a company’s profits to their shareholders. Dividends tell you the real story behind the profitability of a company. Companies that consistently reward shareholders through rising dividend payments are typically well-run, shareholder-friendly, profitable businesses. Being able to consistently increase your dividend suggests that the earnings of the company are relatively stable.

Dividend payments are far more predictable and reliable than a stock's return. It's nearly impossible to predict what the stock price of Johnson & Johnson will be next year, but it’s highly likely they will raise their dividend, like they’ve done for the past 50 years.

Furthermore, if we’re able to identify Dividend Growers, we could achieve outperformance and lower volatility. What good is superior performance if you can’t sleep at night?

Historically, Dividend Growth stocks have shown to be less volatile than non-dividend payers and have outperformed over the long-run, especially in down markets. In a volatile market, are you more willing to sell your shares of Procter & Gamble or Netflix?

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Dividend growth investing can truly build wealth over time and provide the income you need in retirement. At McKinley Carter Wealth Services, we built such a portfolio using this criteria that we call Dividend Focus. In this portfolio, we focus on only those companies who have a strong track-record of rewarding shareholders with increasing dividends and those that will likely continue to have the ability to do so in the future. Our mission is to provide our clients with the resources necessary to Invest in their Good Life.

Visit our website for the full article on Dividend Growth Investing, including a case study analysis.

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