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Twelve smart dividend rules every retirement investor should know


From Dennis Miller of Casey Research:

Many of you have probably filled out one of the “retirement planner” forms available online. Plenty of tax and accounting programs also have “Lifetime Planner” sections for folks to determine if they can afford to retire.

These sorts of programs plug certain assumptions into a formula, such as projected inflation rate, retirement income, anticipated spending levels, and portfolio growth rate. After you add your personal information, it projects how much money you’ll be able to produce annually during retirement, and how long it will last.

The first time I ran these numbers, the program said I was good until 116 years of age. At the time, I believed that if we followed the plan as outlined, my wife and I would never have any real money worries. We’d be set for the rest of our lives and could proudly leave some to our children to help with their retirement. How naïve of me!

Things have sure changed a lot since then.

At the time, I’d estimated inflation at 2% and a minimum yield on our portfolio of 6%. In those days, that was conservative. Inflation was lower than 2%, and you could always earn 6% on a top-rated bond or CD.

Many retirees and baby boomers are now rethinking the entire retirement process. CDs and top-quality bonds no longer pay enough interest to keep up with inflation.

With these options out of the picture, it’s no wonder the stocks of big, solid, dividend-paying companies are soaring. Investors hoping to earn a higher return are pouring money into them with the hope of staying ahead of inflation.

I’m a firm believer that the days of buying a company stock, putting it in a drawer, and never worrying about it again are over. At the same time, folks contemplating their retirement finances will likely have long-term relationships with certain dividend-paying stocks.

While working on our special report, Money Every Month, our lead analyst, Vedran Vuk, really showed me how to sort through hundreds of dividend-paying stocks. I wanted to share some of the tips I learned during the process.

Tip No. 1: Long History of the Company Paying the Dividend
 
Tip No. 2: Payout Ratio of No More Than 80% of the Company’s Earnings Per Share

When our team compiled the list of dividend-paying stocks, they listed them by yield going from the highest to the lowest. Naturally, I went straight to the top of the list.

But our analysts quickly pointed out that if a company earns $0.50/share and is paying a dividend of $0.75/share, it could be in trouble. It’s important to compare the earnings per share and the dividends per share of any investment candidate.

If you’re considering investing in a company with an unusually high payout ratio, always investigate where the money to pay the dividends is coming from.

Tip No. 3: Worldwide Market Presence

The Miller’s Money Forever team is very concerned about inflation of the U.S. dollar. Companies that do business all over the world provide somewhat of a hedge against inflation. McDonald’s, Coca-Cola, Procter & Gamble, and General Mills are a few household names that come to mind.

Tip No. 4

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