Passive Income Investments

Many companies pay a portion of their corporate earnings to shareholders in the form of a dividend. In addition to providing retirement investors with a consistent cash flow, dividend payments are seen as a sign of a company’s financial strength and management’s conviction that it will grow earnings.

These are the several ways that we typically evaluate dividend stocks and decide on the best options for their portfolio:

• A company’s dividend history tells you how long it has been paying a dividend to shareholders. Obviously, a longer dividend history translates to a more reliable payment, although that’s not always the case.
• A stock’s dividend yield is calculated by dividing the dividend payout by the share price. It represents the ‘interest rate’ that you receive for owning the stock. All else equal, you want to maximize the dividend yield to generate the most cash flow.
• The payout ratio is the proportion of earnings paid out as a dividend. If the payout ratio is too high, the dividend yield may not be sustainable over time — particularly if a company has a bad year and experiences a drop in earnings.

The Bottom Line

Dividend investments are a great way to generate cash flow during retirement without relying on fixed income investments.

• Note: The return displayed in this smallcase only includes price appreciation; dividends are not included. In this smallcase, add dividend yield % to verify actual performance.