The generally accepted recommendation for retirees is to reduce risk and buy fixed income investments such as bonds.  A common suggestion is to have the percentage of fixed income assets equal to your age.  What is often overlooked is the risk of inflation eroding purchasing power.

One way to beat inflation is to focus on companies that continuously raise their dividends, such as the “Dividend Aristocrats.”  This gives you a stream of income that rises as fast as the cost of living.

Related: 6 reasons to invest in dividend growth stocks

The Consumer Price Index rose 2.7%.

In the last few months, several companies have announced dividend increases.  Here are a few:

  • TD Bank increased their dividend by 5.6%.
  • Royal Bank had a 6% increase.
  • TransCanada Corp increased by 5%.
  • Rogers Communications increased by a whopping 11%

Bonds vs Dividends

Let’s take the example of Barney and Dorothy.  Close to retirement, Barney is advised to switch his equity mutual funds into “safe” 10-year Government of Canada Bonds earning a yield of approximately 2.3%.

Barney has $100,000 in bonds at a coupon rate of 3%.  He will receive a semi-annual payment of $1,500.  After 5 years he’ll still receive the same payment amount, eroding his purchasing power and perhaps forcing him to dip into his capital thereby taking the risk of outliving his money.

Related: The Risk of Inflation

Dorothy, on the other hand, has gradually over the years been purchasing good quality, dividend-paying stocks.  The year she retires her dividend yield is approximately 3%.  However, after 5 years, her dividends have increased each year so her income stream easily keeps up with inflation.

Dividend growth stocks

I like to stick with companies that regularly increase their dividends.  Retirees who do likewise will generate an income stream that rises each year.

These stocks have raised their dividends for at least five years in a row:

Company Current dividend 5 years ago
CNR 1.50 / share 0.65 / share
Canadian Utilities 1.77 / share 1.20 / share
Enbridge 1.13 / share 0.58 / share
Fortis 1.20 / share 0.67 / share
Telus 2.44 / share 1.20 / share

Final Thoughts

The TSX composite index dividend yield is higher than many bond yields which makes them a better deal, especially after the favourable tax treatment of dividends.  Dividends tend to grow over time, whereas most bond payments do not.

Don’t make the mistake of buying stocks that have the highest dividend yields.  Some companies keep their dividends high (or even continue to raise them) even when earnings are declining.  An ideal dividend payout ratio, depending on the industry, is 30-60% of earnings.

Related: Criteria for selecting a dividend growth stock

If you want to try investing in REITs, be aware that the dividend includes some return of capital.  Make sure you do proper due diligence.

You should hold high-quality companies in the more stable financial, utilities and consumer sectors.  But for a diversified portfolio you should also include stocks in the resource and manufacturing sectors.

My two main goals for my retirement investments are:

  1. To earn income to maintain my lifestyle, and
  2. To safeguard my capital.

Steadily rising, dependable dividends attract income-seeking investors.  As the dividends rise, these investors will also bid up the price of these shares.

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