Dividends are a portion of company earnings usually provided to investors as cash. They represent a way for companies to reward individuals for investing money with them. Some investors desire to use the dividends to help them retire early. They make smart investments so they can live off these dividends during their remaining years.
Investments like growth stocks provide an investor with little to no income during retirement. The individual will need to liquidate holdings in order to have money to pay living expenses. If that person had instead invested in dividend stocks, he or she could use the dividend payments to replace some or all of the current job income.
Individuals can invest in dividend stocks to get a respectable amount of annual dividend income. Saving this money allows them to build a cushion of cash to pay their bills during retirement. Between dividend income and eventual Social Security benefits, the individual may be able to maintain the current lifestyle without having to sell any stock holdings.
Though dividend income is taxed, dividends are really a great tax deal. Qualified dividends carry a 15 percent maximum tax and individuals in very low tax brackets are currently not taxed on dividends. Withdrawing money from a 401(k) or IRA before a certain age results in a federal tax of up to 35 percent. The best part of investing in dividend stocks is that most investors are not forced to trade off dividends for returns. Dividend stocks have historically performed better than other types of stock.
To retire early using dividend stocks, begin investing money into these items to get a nice flow of dividend income. Invest that dividend income into a high-yield savings, money market, or CD account and earn some interest. If you decide to retire early, you will have a nice nest egg that provides enough money to pay for living expenses and even some luxury purchases.