The price and the quality of the stocks you choose are very important especially when investing for the long term such as retirement age. The more years your investment has to compound the more money you will have the day that you decide to stop working for the man. The importance of choosing a reliable investment that can withstand the test of time is something that should not be neglected even if you are investing for a short term. Dividend paying stocks are one of the best investments that you can make in a retirement account that gives you a tax advantage such as a Roth IRA especially if their dividend yields are on the higher side. The good thing about IRAs is that you don’t have to pay taxes on those dividends. If you have a traditional IRA you would have to pay taxes on distributions when you retire but if you have a Roth IRA distributions are not subject to federal taxes when you retire.
When choosing a dividend stock you should do a little research on the dividends paid by the company. Usually, a healthy company has a long history of dividends and dividend growth. This is crucial when making a long term investment. Ultimately, you want payments from the company to grow with each passing year not only as a result of reinvesting them but from increased dividends per share paid by the company. Some companies have been increasing their dividend payments for more than ten years. You can easily find them by researching the Dividend Aristocrats and the Dividend Achievers. These are the types of business that you want in your retirement account. Keep in mind that when researching a company’s payment history not all sites list when a company issues a stock split and as a result you would see that the payment per share suddenly went down in half or by a third depending on the type of split when in reality the shares were spit and as a result so were the dividends.
Most of the time these companies manufacture big name products that withstand the test of time. Many of them have been around for so long that they have become engraved in the minds of consumers. Some of these blue chip stocks can be very good additions to your retirement portfolio because they are companies that have this sort of brand advantage and that have had many profitable years. This is what is called a durable competitive advantage. Usually these companies might not be investments that grow at light speed but they are investments that are durable and that are subject to a lot less volatility than an unknown small cap company that produces plastic cell phone cases that are sold as budget priced items.
Another thing is to learn a little about the businesses and what they produce. Business that sell products that are indispensable to people are usually good long term investments that can withstand recessions and can recover easily after a market crash. Even during a recession people will still wash their teeth, shave their beards, need medicine, eat, take a bath, consume electricity, and do a lot of other daily activities that are important to human life both biologically and socially. Think about products that you use daily or monthly and that you will probably keep on using the rest of your life. It’s actually during a market crash that you may find theses businesses at good prices since most of the time they have rather high valuations. For this reason you should always have some cash in your portfolio. During a market crash cash is king. Never let your portfolio with zero cash unless you have capital accessible that you can send to your brokerage or IRA account in a breeze. Remember that the price you pay for an investment affects your total return. Pay too much for a stock and your return will be low, buy it at a fair price or a cheap price and your total return will be a lot higher. Even a difference of %2 in annual compounding is a lot the more years pass.
You should also check if the company has engaged in share buyback programs throughout its history. Usually a business that engages in this sort of practice is confident that things will be good in the long run. Normally buybacks result in stock prices going up which can do wonders for an investment if you decide to sell your shares for a capital gain. Buybacks also increase your ownership in the company. As the number of shares outstanding goes down your ownership goes up and this is a good thing since earnings are divided into less shares. The impact of buybacks is dramatic over the years as long as the firm remains profitable. Add dividend reinvesting if possible and your net worth may skyrocket as years pass. Share repurchases are better for shareholders when the stock is undervalued. The lower the P/E ratio when the shares are repurchased the better the results in the end.
When planning for retirement one of the best things that you can do is invest in reliable stocks. It can increase your net worth over a lifetime and ultimately turn you into a retired millionaire if done right. Everyone has to start from somewhere, so even if you can’t invest a lot it is recommend by many financial advisors to at least add something to your retirement account each year. Over the years the power of compounding will work out in your favor. In the end the choices you may daily is what gets your closer or farther to achieving your goals and dreams in life.
There is more to it but these tips are a good start in your journey into investing. If you are interested in learning more about investing please subscribe to my info barrel feed. Or add me as a friend if you are also an Infobarrel writer.