When you are considering all the different investment types you can hold within your self-directed IRA, don’t forget about stocks that pay a regular dividend. They’re not very flashy, but they can really help you grow your nest egg. Here are some tips for helping you decide how much of your self-directed IRA you may wish to allocate toward dividend paying stocks.
What are Your Future Income Needs? If you’ve just entered retirement, or are about to do so very soon, then you’ll likely want to focus on how much income your account can generate. Consider covering all or a portion of your budget with the quarterly dividend payments you could be receiving. Given the low interest rates that are now available for savers, many retirees are turning to dividend paying stocks with investment funds that previously would have gone into bank CDs.
What are Your Current Income Needs? Even if you’re still a long way from your target retirement date, you still may have a need for income within your account. For example, if your self-directed IRA owns real estate or a small business, then there may be instances where those investments require some type of additional funds – perhaps for maintenance, expansion, or simply day-to-day operations if there’s been a problem with that business’s cash flow or customer collections.
But since you can’t cover those expenses from outside of the self-directed IRA, you need to either liquidate some of your account holdings in order to free up cash, or have some other source of income. The reliability of income from having at least a portion of your self directed IRA portfolio in dividend paying stocks can be a great financial “insurance policy” against cash flow problems in other self-directed IRA investments.
What Does the Rest of Your Portfolio Look Like? Take a two-pronged approach to asking yourself this question. First, examine the portfolio within your self-directed IRA. Do you need or want exposure to the relative stability of publicly traded stocks that pay dividend? Because the investment opportunities available with a self-directed IRA are relatively broad, there can sometimes be a tendency for some account holders to take on (wittingly or unwittingly) too much risk.
Second, examine your overall investment portfolio; including your taxable accounts, your 401(k), your savings accounts, your personal residence, and any other investments you hold, regardless of the type of account you hold them. Taken as a whole, are you comfortable with the level of diversification you have? Individuals are sometimes unaware that they may be invested in assets that are too speculative, or too conservative, and nature.
In each of these cases, dividend paying stocks can provide growth opportunities while still including the predictability of quarterly dividend payments.