Too many of us are not saving enough for retirement.
In fact, 36 percent of us are not saving at all, according to a survey released today from Bankrate.com. Among millennials, the percentage rises to 69 percent.
Not saving is foolish enough. But even those of us who are saving may not be using all the tools available, like the ability to compound returns by reinvesting dividends in a tax-advantaged account, like a 401(k) plan. When we receive dividends in a retirement account, taxes are deferred until we start drawing on the account. So all those dividends compound tax-free. This can have a huge impact on total return over several decades.
Consider the difference between the S&P 500 Index and the S&P 500 Total Index, which reflects the additional growth generated by reinvesting dividends. If an investor had bought $100 worth of the S&P 500 Total Return basket in January 1990 and reinvested all dividends in a tax-free account, the account would be worth $965 today, compared to $579 for the S&P 500 Index.
Another tool at our disposal: identifying dividend leaders by narrowing the list of buy candidates to companies that yield at least 3 percent and have raised dividend payouts an average of 10 percent annually over the past 5 years.
We found 22 such companies: Boston Properties, Inc. (BXP); CA,Inc. (CA); CME Group Inc. (CME); CMS Energy Corp. (CMS); Coach, Inc. (COH); Darden Restaurants, Inc. (DRI); Ensco Plc (ESV); Freeport-McMoRan Inc. (FCX); Garmin Ltd. (GRMN); Hasbro, Inc. (HAS); L Brands, Inc (LB); Lockheed Martin Corp. (LMT); Lorillard, Inc. (LO); Mattel, Inc. (MAT); McDonald's Corp. (MCD); MeadWestvaco Corp. (MWV); Noble Corp. Plc (NE); Northeast Utilities (NU); Philip Morris International Inc. (PM); Public Storage (PSA); Starwood Hotels & Resorts Worldwide, Inc. (HOT); Wisconsin Energy Corp. (WEC).
Bottom line: Save now; be selective; and utilize every tool available.