Harnessing The Power of 401k Dividend Stocks
Ready to start building wealth in your 401k? The best way to get started with your retirement account is to harness the power of 401k dividend stocks.
Editor’s Note: This is part three in our series on how to invest your 401(k) account. See also:
- How to Maximize Your 401k Plan
- Should You Actively Manage Your 401k?
- Discount Bonds Can Grow Your 401k Profits
- How to Generate Instant 401k Payments
- Common 401k Mistakes To Avoid
- Three 401k Options To Consider When Switching Jobs
What’s the best way to build wealth in your retirement account?
Speculative traders might try to convince you to buy high-profile growth stocks, or to take some other aggressive approach.
But while these investments have their place as a small part of your overall portfolio, most successful investors use much more reliable stocks for building wealth.
According to Standard & Poor’s, dividend income represents roughly 1/3 of the total return for the S&P 500 Index. This means that if you’re not investing in stocks that pay out reliable dividend checks, you could be missing out on a big part of your potential wealth.
That’s why I encourage all investors to consider dividend stocks as a base for their retirement account.
Choosing the Best 401k Dividend Stocks
There is a lot of research that goes into every dividend stock that I recommend. I want to make sure that every opportunity that I show you, lives up to three qualifications:
- Each dividend stock must protect your capital. You worked hard to earn the money in your retirement account. I respect that and want to make sure that you have the least amount of risk possible with your dividend stocks.
- Each dividend stock must have growth potential. The very best dividend situations are ones where the company we’re investing in has a strong and growing business. That way, higher profits will translate to more future income.
- Each dividend company must have reliable cash flow. We’re counting on our company to pay us quarterly dividends that can be used for life expenses. So its important that our companies earn enough cash to cover the dividend payments.
Those are the characteristics I look for in dividend stocks. And the great thing about putting these stocks into your 401k is that the cash dividends you receive can then be reinvested into new shares.
By reinvesting your 401k dividend payments, your balance can grow much more quickly. This is because compound interest kicks in and you get larger and larger payments because you own more and more shares.
Many companies offer a dividend reinvestment program (often called a DRIP). These programs automatically buy new shares with your dividend payments. You don’t have to do anything for the compound interest benefits to kick in. I love DRIPs and would encourage you to use them to maximize your 401k dividend payments.
The Only Dividend Stocks to Avoid in Your 401k
There are a few dividend stocks that you should avoid in your 401k.
Shares of Limited Partnerships (LPs) or Real Estate Investment Trusts (REITs) should generally be used in a taxable brokerage account instead of your retirement account. There are two reasons for this.
First, these shares have special tax benefits for shareholders. If you’re investing in a tax-free or tax-deferred account (like a 401k or an IRA), you won’t be taking advantage of the full tax benefit of these companies’ structure.
Second, if you collect too much income from these types of investments in your retirement account, you may be liable for extra tax payments.
If you’re unsure about whether you should put these shares in your retirement account, it’s best to check with your personal accountant. But as a general rule, its best to avoid LP’s and REITS in your retirement account.