After years of working, saving, and investing, retirees are faced with the challenge of creating an income stream to meet expenses and provide for their lifestyle in their golden years. While bonds have been the traditional method to achieve this purpose, dividend stocks may offer certain advantages to income-seeking investors.

Income from dividends

The income from dividend stocks is paid to the shareholders usually in the form of an electronic transfer or else a physical check. The retiree is able to use their dividends to pay for basic recurring living expenses in retirement or to fund a particular desired retirement lifestyle.

Capital Appreciation

Seeking to attain dividends necessitates the purchase of a stock. An additional advantage of dividends over other income sources is the capital appreciation of the underlying stock. Exposure to the stock market will possibly increase the volatility of the investor portfolio, but dividend stocks are generally the most stable, well-established companies in the market. The prices of these stocks are generally steadier than the overall market and may compare favorably to the prices of other assets, such as bonds. With individuals living longer and having more years in their retirement, the appreciation of a stock portfolio offers a considerable benefit over other income investments.

DRIPs

If an investor does not require dividends for income purposes, they can take advantage of Dividend Reinvestment Plans (DRIPs) which are offered by many corporations. Instead of receiving the dividend directly from the corporation, the investor can choose to use the dividend payment to buy additional equity shares in the business. While regular taxes are due on the dividend payment, the investor can generally avoid any brokerage commissions or other fees that are usually associated with buying stock. By using DRIPs, the investor is in effect compounding the dividend payments. Since the dividends were used to purchase additional shares of stock, the investor will be eligible to receive additional future dividend payments.

Tax advantages of dividends

One of the main advantages of dividend stocks over other income sources is their tax treatment. While interest and other income from sources such as bonds are taxed at the individual’s normal income tax rate, dividends are taxed at a special rate. With the recent extension of the tax legislation, qualified dividends will be taxed at 15% for at least the next two years. The median wage earner is generally in the 25% ordinary income tax bracket. Those near retirement age may be earning significantly more and therefore will be in a much higher tax bracket. By generating income from dividends, investors can keep more of their earnings for themselves.