Sunday, March 25, 2012

Planning for retirement? Read this

If you want to start planning for a retirement, there are options galore we believe. Every financial firm worth its name will line up a whole range of products to cater to this particular need of yours. And more often than not, stocks find themselves at the bottom of this pecking order. Conventional wisdom has it that stocks are risky by nature. Therefore, they cannot be relied upon to offer a regular stream of income once a person quits work.

The conventional wisdom has it wrong we believe. Although stocks carry more risk, not all of them are risky. Besides, even regular stream of income can be assured if the stocks under consideration are bought for their dividend income. Thus, a portfolio of stocks that is not only fundamentally strong but also throws off a lot of dividends can be one of the most effective retirement options out there.

But deciding to build a portfolio of dividend producing stocks in order to achieve full financial freedom is only half the job done we believe. Nothing can be more damaging than ending up with dud stocks and this is where the investor really has to be on its toes. Thankfully though, there are a few pointers that can prove to be of immense help.

A blog by the name of dividend growth investor has argued that only those companies should be considered that have a long history of paying and raising dividends. Not to forget that such stocks have to be bought at attractive valuations. The blog believes that paying a P/E of more than 20 for such stocks can prove to be risky in the long run. Lastly, the prospective portfolio companies should have a sustainable and a well defined moat. This point cannot be emphasised enough. A company with an eroding moat will soon be forced to either fully stop its dividend payouts or lower dividends considerably. Hence, this aspect has to be thoroughly looked into.

We are of the view that a well diversified portfolio of dividend stocks with the above characteristics in mind can prove to be your best bet for financial freedom and it can help you achieve this goal much earlier than imagined.

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