The Federal Reserve appears on the verge of finally raising short-term interest rates for the first time since the bank dropped it to zero during the 2008 global financial crisis. The shift toward a higher interest rate environment will be positive for retirees, who often rely on interest rate returns for an income stream.
Don't get too excited, though. The Fed is expected to hike interest rates at a slow and measured pace to maintain financial market equilibrium and avoid shocking the economy and overall growth. This means income-oriented investors still need to look for other sources of income beyond traditional certificates of deposit and other bank interest-bearing accounts.
Dividend investing, or choosing stocks with a reliable cash payout, is a proven strategy. "In the stock market, there are two paths to return on investment: capital appreciation and dividends. Of the two paths, the only one with any reliability is the cash dividend," says Kelley Wright, chief investment officer of IQ Trends Private Client Asset Management, a Carlsbad, California-based registered investment advisory company.
Investors seeking a reliable rate of return can look to blue-chip dividend-paying stocks with confidence. "The cash dividend is a company policy. It must be voted on, declared and authorized by the board of directors, who arguably know the current condition of the company better than anyone else, as well as the prospects for the future. The cash dividend has a record date, an ex-date and a pay date," Wright says.
Dividend investing turns stocks into sources of current income more like bonds or even an old-fashioned high-yield certificate of deposit, says Hilary Kramer, New York City-based editor of the GameChangers stock newsletter. "Think of it as annuitizing your capital. The higher the implied rate of return you can capture, the faster the quarterly distributions will pay back your initial investment. Maybe the share price increases in the meantime, but that's just a bonus," Kramer says.
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