With interest rates at an all time low, most retirees are keen to take a look at anything that could add to their retirement income. When we’re younger, stock market investments tend to be focused on capital growth because we’re trying to build up pension pots, or pay for children’s college fees. It takes a bit of refocusing to view the stock market in terms of what it can do to boost income.
Many of us find in retirement that while we’ve retired, our brains haven’t. So share trading and investing can also become an interesting hobby. Where retirees can win out, is that they have more time to read up company backgrounds, so they can make better informed decisions. Additionally, a certain amount of detachment from the hurly-burly of working life can lead to more objective thinking and make older investors less likely to behave like sheep, following the market no matter what.
How much risk can you handle?
When you consider income from the stock market, you first have to decide how much risk you are willing to take on. If you have a limited income and little to spare, you need to be careful about risky investments. The safer choices will be well-established companies, in sectors that everybody needs, such as utilities. Go-go technology start-ups are probably best avoided – and in any case, many are famous for never paying dividends.
The safer route – stocks that pay dividends
Dividends from stocks are usually paid twice a year. When you go online and look up a stock, you’ll find the dividend expressed as a percentage of the share price. However, it’s easy to be misled. If you see a nice high dividend – say 10%, you should investigate further and prepare to be disappointed.
This is because one way that a stock’s dividend goes sky high, is that its share price has taken a dive. Imagine that XYZ Corporation is trading at 3.00 per share, and paying a dividend of 5% - that’s 15.00 (pounds, dollars or euros, it makes no difference to this example).
Then something goes badly wrong and XYZ’s Chief Executive has to warn that profits for the year will be taking a hit. The share price falls to 150.00. But the dividend level quoted will be the last one that was paid – 15.00. This is now 10%. But we can be sure that the Chief Exec will be slashing the pay-out next time.
So if you see a great dividend, use online charting tools (CMC Markets have some good ones), to take a look at the share price and dividends over the past year or two. You’ll find that the steady, regular payers are often quite expensive and their dividends are under 5%. But remember that over time, that dividend will rise.
Trading for income
There’s a different route to earning an income from the stock market, but it’s riskier and you should probably only use part of the money you have – and then make sure you wouldn’t be completely sunk if you lost that amount.
This option involves trading online, where you can trade on margin – that means that you can buy stock without having to put up all the cash necessary. However, bear in mind that you are making a commitment to buy at that price. If the price suddenly drops, you may be asked to put more margin, as a security measure.
There are many ways to trade on margin, including “spread betting” where you decide whether a stock will rise or fall, and stake money on it. Contracts for Difference (CFDs) are another variation of this. However they all come with a health warning – you can lose far more than your deposit if the bet goes wrong, so you need to use some of the control measures the brokers offer, such as “stop losses” – research these before plunging into day trading.
That said, there are people who trade from their homes or while travelling, never holding a stock overnight, and make a living at it. Whatever your goals and intentions are when it comes to making money on the stock market be sure to make each decision with careful consideration as well as enjoying the experience to make your time really worth while.
Retired Brains does not offer direct financial investment advice, nor do we affiliate ourselves with any particular financial advisers or firms in the United States or worldwide. Rather, the sole purpose of this article is to present educational, helpful information that can help you decide what kind of investing strategy is right for you in your retirement. If you are interested in learning more about property or pension fund investing, we recommend seeking out a reputable adviser or firm in your area for assistance.