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3 Ways Dividend Aristocrats Can Enrich Your Retirement

Most people look forward to the day they can stop depending on a job for money, live off a fixed income, and have the freedom to get up every morning and do anything they want. Just think of it: no bosses, no commute, no negotiating for raises. Sounds dreamy.

The challenge, however, comes in that "fixed income" part. While Social Security will cover a chunk of your expenses, it's only set up to provide 40% of your pre-retirement wages.

It's generally believed that you'll need about 80% of your former income once you retire, so you'll have to somehow account for the 40% that Social Security doesn't provide. That's where Dividend Aristocrats come in, since adding them to your portfolio can help enrich your retirement.

Image source: Getty Images.

What are Dividend Aristocrats?

Dividend Aristocrats are companies in the S&P 500 that have paid and increased their dividends each year for the past 25 years. There are currently 66 companies on the list, including many of the greatest American businesses, such as 3M, Coca-Cola, Johnson & Johnson, and Target, to name a few.

The Dividend Aristocrats, as a group, have outperformed the S&P 500 in 8 of the last 10 years. In addition, they offer reasonable diversification because they're spread across a variety of market sectors, including consumer staples, industrials, pharmaceuticals, and financials. And if that's not enough, here are three additional ways they can enhance your retirement portfolio.

1. They provide continuous income

One of the most important keys to income in retirement is making sure it's always coming in. That's where dividends play a part: No matter whether stocks rise or fall, dividends will be paid. And if stocks are falling, your dividend may even be larger, as the yield (which is the percentage of the stock price that you'll actually receive in cash via a dividend) will rise as the stock price falls.

During the coronavirus pandemic, some huge companies, like Disney, have been forced to temporarily suspend their dividend payouts in order to stay financially strong (but it's not an Aristocrat, after all). When the economy gets tough, the Aristocrats will still be paying their dividends if past performance is any indication, which means money will always be flowing into your account.

2. The can weather any storm

Dividends are generally going to be paid to investors, no matter what's happening in the economy or stock market. During the pandemic, none of the Aristocrats have cut their dividends, as opposed to 63 companies in the S&P 500 that have either cut or eliminated them. And while the S&P 500 has been outperforming the Dividend Aristocrats during the past few years, the latter have solidly beat the former over the last 15.

3. They can beat the market over long periods of time

Some investors believe that by investing in "safe" stocks that provide long-term dividends, they're hurting the ability of their portfolios to grow. And retirees, who are looking for stability, are generally willing to make that deal. But by investing in Dividend Aristocrats, you don't necessarily need to make that trade-off.

According to Hartford Funds, dividend-paying stocks returned an average of 9.25% per year from the period 1972 to 2017, while the S&P 500 only returned 7.7% over that time. While that may not always be the case, it shows that you won't necessarily be sacrificing growth during your retirement, as long as you keep the growth part of your retirement portfolio focused on the long term and don't panic sell when there are market pullbacks.

The one thing you don't want to do during your retirement is worry about money. By investing in Dividend Aristocrats, you'll ensure that stocks you buy will always be enriching your portfolio, while you're out enriching your life.

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Barbara Eisner Bayer owns shares of 3M and Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends 3M and Johnson & Johnson and recommends the following options: long January 2021 $60 calls on Walt Disney. The Motley Fool has a disclosure policy.


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