Generating a growing passive-income stream in retirement is not necessarily a simple process. There are a wide range of options available, such as bonds, property and stocks, while the uncertainty facing the world economy could mean additional risk is present for retirees who are seeking a resilient income stream.
Dividend stocks, though, appear to offer an appealing risk/reward ratio at the present time. Their relatively high income returns, as well as the potential for long-term capital growth, may mean that they are an obvious choice for retirees who are aiming to enjoy financial freedom in older age.
While investing in assets such as bonds and property has been a popular means for retirees to generate a passive income in the past, both asset classes currently appear to lack appeal versus dividend stocks.
Bonds, for example, may offer relatively low income returns at the present time following a sustained period of historically-low interest rates. As such, they may be unable to provide a sufficiently high level of income for retirees.
Property, meanwhile, has enjoyed strong growth on a global basis over the last decade. Valuations across many regions now suggest that there may be less scope for similar returns in the medium term.
Resilient income stream
Dividend stocks, meanwhile, continue to trade on modest valuations across a number of industries. As such, it is possible to obtain a relatively high income return while also benefitting from diversification across a range of sectors and geographies.
This could improve the resilience of your passive income stream though reducing company-specific risk. In other words, the impact of a company failing to pay its dividend would be more limited in a well-diversified portfolio when compared a more concentrated range of holdings.
With the stock market having a strong track record in terms of its growth performance versus other assets, stocks could offer a passive-income stream that outpaces those offered by other mainstream assets. As such, from a risk/reward perspective, they seem to have relative appeal on a long-term outlook.
Of course, the world economy faces an uncertain near-term future. The prospect of a full-scale trade war between the US and China may hold back the financial outlooks of a wide range of companies, and could impact negatively on their valuations.
However, this could prove to be an opportune time to buy dividend stocks. In many cases, investors may have priced in the potential short-term risks that they face, which may lead to a more favourable risk/reward ratio for new investors. Indeed, lower valuations can equate to higher present-day income returns.
Therefore, while dividend stocks may experience a volatile period, they appear to be the most attractive means of generating a growing income stream in retirement. Over the long term they offer capital growth, diversity and the chance to experience financial freedom in older age.
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.