As we rang in the new year last week, I asked my 12-year-old twins what they thought they’d tell their kids about 2020.
I wondered if they’d share stories of doing schoolwork together in the living room, roasting s’mores over a fire in the backyard or taking hikes to the top of Kennesaw Mountain near our house.
Autumn’s immediate response was, “We don’t talk about 2020!”
And Emma said that when her kids open their history books, the pages about 2020 would be ripped out.
So much for the special memories I tried to make with them!
Of course, they were mostly joking. And the more we talked, the more we realized that some parts of 2020 really weren’t that bad.
And the same can be said when it comes to your retirement!
So today, I want to tell you about a new record set in 2020 that added to investors’ wealth last year.
Better yet, this trend also gives you a better foundation for building your retirement income in the years ahead!
The Year When Dividends Rose — Despite the Challenges
In addition to stock prices hitting record highs last year, there was another record that caught income investors by surprise.
Dividend payments from companies in the S&P 500 also hit a new all-time high in 2020. That’s impressive, especially given the fact that many high-profile dividend payers suspended their dividends when the coronavirus crisis first hit.
You see, companies in vulnerable areas of the economy (like car manufacturers, restaurants and even some real estate sectors) had to cut dividend payments. That way the firms could keep cash on hand to cover expenses while they waited for profits to return.
Meanwhile, the Fed prevented another group of dividend stocks from increasing payouts to investors. Since the Fed was worried about a widespread economic pullback, the largest regulated banks weren’t allowed to boost their dividends this year.
Unfortunately, this regulation kept big bank stocks from picking up the slack from companies that had to pause their payments.
I feared that retirees invested in a balanced assortment of dividend stocks might wind up earning less income from their positions. And that would have been extremely disappointing at a time when retirees faced so many other challenges.
Thankfully, that’s not actually what happened.
According to a recent Barron’s report, companies in the S&P 500 paid total dividends of $58.28 per share in 2020 — an improvement of 0.7% from 2019’s payouts.
Of course, a 0.7% raise isn’t much to celebrate. But it’s certainly encouraging to see some income increase.
And keep in mind that shares of many dividend stocks traded higher during the year, so investors grew their wealth on top of getting a small bump in income.
Looking Forward to Much Bigger Increases in 2021
Looking ahead into 2021, I expect a much bigger increase in dividends for retirees.
For starters, many of the companies that suspended their dividends last year have already reinstated them.
In some cases, the companies have begun paying a fraction of the dividend they used to. But as business picks back up, those dividends should once again reach their previous levels.
Right now it’s a healthy sign that management teams are confident enough to send cash to investors, knowing that their businesses are now stable enough to stop hoarding cash.
And at the same time, now that there’s an end in sight to the coronavirus crisis, banks are much more likely to get the green light from the Fed allowing them to increase payouts to shareholders. So bank dividend stocks like Bank of America Corp. (BAC) will soon offer investors more income for every dollar invested.
As income investors, we’ll also benefit from the normal dividend increases that the best stocks continue to post year after year like clockwork.
And as income payments grow, our dividend stocks will naturally become more attractive to new investors. So as more capital moves into these stocks, the buying pressure will push the stock prices higher.
If you’re invested in these stocks ahead of time, you’ll benefit from the higher payments and more wealth as the stock values rise.
Bottom line: 2021 is a great time to be an income investor. And growing a balanced portfolio of income stocks is one of the best ways I know to consistently build your wealth.