If you are approaching the retirement age and feeling increasingly worried, you are not alone.
The government rolled out a slew of financial measures to support “young seniors”, categorised as those in their 50s and 60s, during the recent National Day Rally.
Higher costs arising from inflation are the main culprit contributing to such worries.
Being “sandwiched” between old parents and school-going kids is another as this group not only has to support ageing parents but also needs money to nurture and feed their children.
Investing is a surefire way to not just help you to beat inflation, but also build up a valuable nest egg that you can use for your golden years.
To be more specific, you should park your money in dividend-paying stocks.
Such stocks can enable you to retire without worries for three great reasons.
1. A passive stream of non-taxable income
The beauty of dividend stocks is that they pay out a regular and consistent stream of income that flows directly into your bank account.
This income is “passive” as you do not need to work or exert any effort to “earn” it.
An example of a great asset class for dividend income is real estate investment trusts or REITs.
REITs own and manage portfolios of property assets and need to pay out at least 90% of their profits as distributions to enjoy tax benefits.
Because of this requirement, REITs qualify as dependable dividend payers.
Some, such as Mapletree Industrial Trust (SGX: ME8U), pay distributions quarterly while others such as Parkway Life REIT (SGX: C2PU) pay half-yearly distributions.
To add icing on the cake, an investor will not need to pay any taxes on dividend income received.
A property investor, on the other hand, will need to declare his or her rental income which is then taxed by the taxman.
You can enjoy the best of both worlds when you park your money in dividend-paying stocks.
Not only will you receive a flow of constant cash into your bank account, but this dividend income is also tax-free.
2. Solid businesses churning out consistent free cash flow
Next, dividend-paying stocks normally generate consistent positive free cash flow.
This cash flow underpins their ability to keep paying out dividends over the years.
By observing a company’s dividend track record, you can imply that it is well-run and can also churn out copious free cash flow to sustain its dividend payments.
Take Sheng Siong (SGX: OV8) for instance.
The supermarket operator has been a reliable payer of dividends for more than a decade.
The retailer also generated positive free cash flow in 10 out of the last 12 years, a testament to the strength of its underlying business.
Yet another solid business is luxury watch retailer The Hour Glass (SGX: AGS).
The group also paid out dividends over more than a decade and has generated positive free cash flow in the last 12 consecutive years.
Therefore, owning such dividend stocks means you also get to enjoy peace of mind as these businesses have a long history of generating healthy free cash flow which allows them to sustain their dividend payments.
3. The ability to increase payouts over time
The best reason to own dividend stocks is that these dividends can increase over time.
This fact makes stocks vastly different from bonds that come packaged with a fixed coupon rate that never changes over the life of the bond.
If the business grows its profits and cash flows, management may decide to pay out a higher dividend.
If the good performance can be sustained over time, there is no limit to how high these dividends can go.
DBS Group (SGX: D05), Singapore’s largest bank, recently upped its quarterly dividend by 33% year on year to S$0.48 when it announced its latest quarterly earnings.
Integrated healthcare player Raffles Medical Group (SGX: BSL) increased its final dividend from S$0.028 to S$0.038 in 2022 when it reported a strong set of financial numbers.
These three examples are just the tip of the iceberg.
There are many more instances where strong, growing businesses increased their dividends in tandem with good financial results.
By owning such stocks, you can also see your dividend income rising steadily over time.
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Disclosure: Royston Yang owns shares of DBS Group, Mapletree Industrial Trust, Singapore Exchange Limited and Raffles Medical Group.