Replacing your salary with passive income may seem like a major task that takes years of investing to achieve.
However, that task could be made easier by investing in dividend-paying stocks that are expected to raise their payouts over the long run.
Not only can these stocks offer a generous, and growing, passive income, they may also deliver impressive capital growth.
Investing for income
There is a wide range of stocks that pay generous dividends.
It is fairly straightforward for an investor to obtain a dividend yield that beats inflation from a portfolio of stocks, as compared to the yield of other mainstream assets such as bonds and property.
However, investing for income is more than just about seeking the highest yields that are available.
For instance, a company’s dividend payments may grow over the long run, becoming a key factor that can help you to generate a higher, yet sustainable, passive income in retirement.
Therefore, it is crucial for investors to focus on the potential for a company to pay a higher dividend over the long run.
Another factor to look out for is the company’s dividend payout ratio, which is the proportion of its profits that are paid out as dividends.
In addition, investors may want to look under the hood to figure out the financial prospects of the business and its growth runway.
These factors are vital in determining whether the company can continue to raise its dividend over time.
As such, it could be argued that while the current yield is important, the rate of dividend growth is likely to be more significant for retirees who require increasing passive income through older age.
It could even be worth sacrificing a high yield in favour of a lower yield that offers greater scope for a rapidly-rising dividend payment in the long term.
Investing for growth
While generating a passive income is a key priority in retirement, stocks that offer impressive levels of dividend growth could also generate significant capital growth.
Investor demand for such stocks could increase as their financial performance improves.
The prospect of a higher yield will also boost sentiment, leading to a steadily-increasing share price.
Stocks with high dividend growth prospects will naturally appeal to individuals who are seeking to build a nest egg for retirement.
However, they are also likely to be of interest to retirees.
After all, a larger flow of passive income is ideal for one’s golden years as it provides financial freedom and the ability to make better use of your time.
Get Smart: Focus on the right metric
Generating a passive income for retirement may seem daunting at the start.
However, know that it is possible to build a diverse portfolio of stocks that, together, offer an impressive total return.
By focusing on dividend growth, investors will end up owning a portfolio of strong, stable companies that will provide an increased stream of income and capital gains over the long-term.
As such, focusing on dividend growth, rather than solely on yield, is a shrewd move.
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Disclaimer: Royston Yang does not own any of the companies mentioned.
