When we go through the many comments we receive from TSI Network readers, the subject that seems to come up most often is dividend stocks. That’s not surprising, perhaps, since the first principle in our 3-part investment strategy is to mainly buy well-established, dividend-paying stocks.

Another subject that draws many questions and strong opinions from our readers is retirement planning. And the idea of planning your retirement around dividends is one that appeals to many investors. When Pat replied to a specific question on this strategy two and a half months ago, it became the most watched of the weekly videos he has posted on the network over the past four months.

It seems like a good time to have another look at this video, particularly because Pat’s answer holds a word of caution for investors: simply buying and holding dividend stocks may not be quite enough to accomplish your goals.

Q: Pat, here’s an interesting question. As I get closer to retirement, do you think I’ll be able to live off my dividends? How should I go about it?

Pat McKeough: I think dividends play a very important role in retirement, but not quite the way people think of it. A history of 10 or 15 years, or five years of dividends, is kind of a pedigree for a stock. It tells you the stock has been looking after its investors for a good period of time.

And that record of dividend payments is something you can’t fake. So it’s a very good idea in retirement to confine your buying to stocks that do have a dividend record, not just a current dividend.

But if you’re investing the way a stock market investor should, there’ll be some years when you need to sell things, whether it’s a stock that’s being bought in a takeover, or whether it’s come to be too big a part of your portfolio. Then that’s something you’re going to want to sell part of or all of.

And when that happens, capital gains are every bit as spendable as dividends. So people like to think, can I make a passive income portfolio; that is, a portfolio that I’ll just set it up once and forget about it. It’s a mistake to do that. Some people think that buy-and-hold means buy and forget about it. It really should be buy, hold and watch carefully.

When you build your retirement portfolio out of stocks that pay dividends, you have fewer unpleasant surprises and a better, more stable source of retirement income, from steady dividends and occasional capital gains.

The Growing Power of Dividends Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

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