When it comes to retirement investing, income usually is the main concern for investors, and dividend yield is often considered one of the best ways to generate that income. This holds true both in the runup to retirement, when dividends can be reinvested and thereby increase returns, as well as post retirement, when dividends supplement the retiree's income.
In the case of a dividend yield, investors should assess the potential for growth in the dividend over time, and, indeed, the sustainability of the dividend, which means having a view of the prospects for the continued success of the underlying business, says Michael Keaveney, Head of Investment Management at Morningstar Canada.
Having said that, in the context of an overall investment portfolio, even one focused on income, it is prudent to consider a combination of both dividend growers and high-yield stocks. Companies with a lower yield at present, but a good record of growing the dividend, and good prospects for continued growth in the business may well be the higher dividend companies of the future. Companies with a high dividend yield currently, but no signs of growth, may be in a stage of development where future dividends don't keep up with inflation or, in the worst-case scenarios, could be in jeopardy, Keaveney said.
