Why would someone looking to build a retirement nest egg care about dividends? The most obvious answer here is that dividends are the purest form of passive income. All you have to do is own a dividend-paying investment and you will watch your account grow bigger. Own enough dividend-paying investments after a certain age and you will not have to work another day in your life. But let’s consider dividend investing from the perspective of someone with a Self-Directed IRA.
According to some statistics, a well-placed dividend investment will add a lot to your returns. Consider that over the past 50 years, the S&P 500 has returned about 6.5% on average. That’s a nice return if you can guarantee it. But when you add in dividends, that return jumps to 9.75%. With a $1,000 investment over 50 years, that percentage leap represents the difference between $24,000 and $115,000.
In short, dividends are one of the best shortcuts to a better rate of return—and more wealth in your portfolio. If you know how to invest in them.
Building a Dividend Portfolio with a Self-Directed IRA
Because so many investors turn to a Self-Directed IRA to diversify out of the S&P 500—in other words, the public stock market—it begs the question: how do you build a dividend portfolio if you want to rely less on public stocks? A dip in the S&P 500, after all, would decrease the value of those dividends no matter what account you use to invest in the stock market.
One option for investors is to build a portfolio of income-generating real estate. By owning real estate within a Self-Directed IRA, you could generate what are essentially monthly dividends with regular rent payments. In fact, this cash flow is one of the reasons that Forbes lists real estate as one of the most consistent ways to build wealth. The same logic that extends to dividends expanding the potential returns from stocks applies to real estate. There’s simply no replacing that regular cash flow when it comes to investing.
True: real estate investing is not exactly the same as dividend investing. But when you invest with non-recourse loans within a Self-Directed Real Estate, you will be expected to remove yourself from the investment with the cooperation of a third-party property manager. With this property manager in place, real estate with strong cash flow will function very closely to a dividend investment. You will be hands-off and allow the real estate to generate consistent income without having to respond to every little complaint about the faucets.
Building a Portfolio that Grows with Dividends
Some investors complain that an investment that provides regular cash flow through dividends will subtract from the overall value of the investments. After all, a popular stock has to pay out dividends every quarter—doesn’t that money come out of the value of the stock itself?
The truth is a little more complicated than that. And that can work to your advantage.
There’s no telling how much a dividend impacts the price of a stock. But if you own both dividend-paying stocks and real estate with cash flow within your retirement accounts, you can build a reliable source of income that goes beyond the appreciation of the assets. There’s an inherent value to having confidence that the assets you own will continue to boost your retirement portfolio, month in and month out.
With that in mind, keep a few things in mind as you think about dividend investing strategies with a Self-Directed IRA:
- Diversify across asset classes. Dividend-bearing stocks are great for a Traditional IRA. But you can also build monthly cash flow into your account with a Self-Directed IRA.
- Remember that dividends can boost overall returns. Do not rely just on the appreciation of your investments to build wealth over the long term.
- Reinvest your dividends. If you really want to maximize the value of your cash flow, continue to invest your money back into your retirement accounts.
With a well-constructed dividend and cash flow portfolio, you will build wealth, give yourself a steady source of income, and prepare a retirement nest egg that can give you financial independence sooner than you may have thought.