Your Retirement Strategy—It Doesn’t Have to Be Complicated
If you’re saving for retirement, you probably have some exposure to the stock market, whether it’s through individual companies, mutual funds, or exchange-traded funds (ETFs). Right now, the interest rate cycle favors the stock market, but a lot of investors aren’t very encouraged by the stock market and its potential for good returns. This is largely because of the extreme volatility we’ve had in share prices over the last 12 years. Big corporations seem to be doing great, but the volatility on the stock market can really wear you down. And depending on when you’re planning for retirement, the volatility of your investments can be directly responsible for your timeframe.
Mutual funds have gone a long way towards helping investors diversify, but by the time you pay those management fees and expenses, most funds don’t beat the major indices. I’ve always thought that a good way to save for retirement is to have exposure to the stock market through both an index and individual companies. You can build positions in both when share prices are down.
Of course, one of the best ways to build wealth for retirement is through the use of a DRIP, otherwise known as a dividend reinvestment plan. It’s one of the best ways to boost your investment returns over time—take those dividend payments and reinvest them in new shares of a good company with an excellent long-term track record of wealth creation on the stock market.
One such company that I like to point out that fits well into this investment strategy is PepsiCo, Inc. (NYSE/PEP). PepsiCo is a lot more than just a soft drink company, and its long-term wealth creation for shareholders has been exemplary.
I think you can take a company like PepsiCo and turn it into a nice retirement nest egg if you’re an investor with a tolerance for stocks. The key to this kind of investment strategy is to build a position in the company over time, when the stock or stock market is down. PepsiCo has proven over time to slowly recover from its price retreats. The company offers a full or partial DRIP, where you can reinvest all or just a portion of quarterly dividends into new shares of the company. And the end result is a growing equity position in a good company with a long track record of wealth creation on the stock market.
In today’s environment, with the broader stock market being so volatile, quarterly dividend income is a very important part of investment returns. Once you retire, you can use the dividend income from a company like PepsiCo for your living expenses. But before you actually get to retirement, you can build that nest egg quite substantially over time by reinvesting those dividends in new shares; thereby creating an even larger position for yourself, garnering even more dividends for your eventual retirement. That’s the magic of blue-chip investing—the dividends. They are the best way to build wealth for your retirement and a great way to enjoy your retirement when you need the income.