ENB:CC - Forget the 4% Rule: Here's What You Should Really Be Looking at During Retirement
2024-01-19 21:00:00 ET
“The 4% Rule is a practical rule of thumb that may be used by retirees to decide how much they should withdraw from their retirement funds each year,” as explained by Investopedia . The idea is to withdraw for your spending needs in retirement but also leave a large enough portfolio to continue growing so that you don’t outspend your money. Ideally, you want the growth to more than outpace inflation.
Investopedia noted that “the rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976. Some experts suggest 3% is a safer withdrawal rate with current interest rates; others think 5% could be OK.”
Instead of being fixated on whether it should be a 4%, 3%, or 5% rule, investors should really be more focused on the income they generate from their investments. Ideally, you’d want to generate enough safe income so that you won’t be spending down your principal. This way you will be sure to never run out of money and can leave a legacy for your children, grandchildren, or charities you care about.
There are many success stories out there of people who are practically living off of their dividends alone. They hold dividend stocks that they might have started buying decades ago. These stocks typically grow their dividends over time at a faster rate than inflation.
(Soon-to-be) retirees who may be late to investing might need to put more of their funds in high-yield stocks to generate more income. Here are a couple of big dividend stocks that are popular among retirees.
Enbridge stock offers a 7.6% yield
For every $10,000 invested in Enbridge ( TSX:ENB ) stock today, investors can earn almost $760 a year. Since it pays out a quarterly dividend, the investment would bring in income of close to $190 every quarter. The large North American energy infrastructure company is a diligent dividend payer. It has paid dividends for about 71 years, and it has a dividend growth streak of about 28 consecutive years.
As a mature company and in a higher interest rate environment, its dividend growth rate has dropped to about 3% since late 2020. Higher rates have also kept its valuation in check. Sure enough, analysts believe the stock is fairly valued at the recent price of $48.29. Because Enbridge still continues to generate substantial cash flows from its massive operations, the energy stock currently offers a safe dividend yield of almost 7.6%, which is perfect for income-focused retirees.
Management currently guides for medium-term growth of about 5%. So, it’s possible for investors to make annualized total returns of about 12%. Though, it would be more conservative to target total returns of about 10%. If you’re looking for a bigger margin of safety, see if you can buy on a dip to at least $46, which would start you off with a dividend yield of close to 8%.
BCE stock offers a dividend yielding 6.9%
Unlike Enbridge stock that appears to be dipping, BCE ( TSX:BCE ) stock seems to be working its way up. Like Enbridge, the big Canadian telecom stock has also been pressured by higher interest rates.
It may come as a surprise to investors that BCE has an even longer dividend-paying history than Enbridge. It has paid dividends for about 142 years, and it has a dividend growth streak of about 15 consecutive years. Its recent dividend increases have been higher than Enbridge’s as well at about 5%.
BCE is also a slow growth business, but over the next few years, lower capital spending could boost its free cash flow generation, resulting in more dividend increases and naturally, a higher stock price.
The post Forget the 4% Rule: Here’s What You Should Really Be Looking at During Retirement appeared first on The Motley Fool Canada .
Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy .
2024