Buzzwords abound in today’s society: passive income, cash back rewards, and now free retirement stock. But are these buzzwords full of fluff, or is there anything investors can really benefit from here?
We’ve all heard the saying “nothing in life is free.” And I’m sorry to report that statement still holds quite true.
However, in this article, we’re going to take a look at how investors can actually accumulate stocks in retirement accounts with very little cash investment upfront. Some methods are small potatoes, and some methods we’ll examine can grow into a significant cash crop.
Is Free Retirement Stock Really a Thing?
Free stuff. Is there anyone who doesn’t like it? Maybe you don’t need the free pens your bank wants to give you, but if they offered you free cash or free stock, you’d be lining up for it.
So is free stock simply too good to be true? The answer is no.
When it comes to securing free retirement stock, it is possible. You just need to know where to look.
Where to Find Free Retirement Stock
As mentioned earlier, some free stock will be very small potatoes. But with the power of compounding, and if you find the right kind of stocks, free stock can become something with real potential and a key part of your retirement plan.
The Small Potatoes: Apps Offering Free Stock
Brokerage or investing apps like Robinhood and M1 Finance try to entice investors to use their products by offering free stock.
Upon opening a free account with the investing app Robinhood, the app will give you anywhere between $2.50 and $200 worth of free stock in companies like Visa (NYSE:V), Microsoft (NASDAQ:MSFT) and GE (NYSE:GE).
Once you download your account, you can then buy and trade stocks, options, and exchange-traded funds (ETFs) for free. (Robinhood doesn’t offer bonds or mutual funds.) The free stock you receive is chosen randomly, which is why it can range in value, and of course, the stock market can also fluctuate.
Other apps like M1 Finance will give you $10 to purchase a stock if you refer a friend who funds an account.
Of course, any free cash you receive will be treated as taxable income.
Will these options make you rich? Probably not, but some stock is better than no stock. And if you can secure a blue-chip stock for your balance sheet, why not?
Planting a Future Cash Crop with Free Stocks
Investors creating a retirement portfolio need to consider many things. You’ve got to generate enough income without employment and, at the same time, make sure you don’t outlive your income stream. This is why dividend stocks and their payouts are so attractive for retirement planning.
When stocks pay dividends, and you reinvest those dividends, it’s essentially like earning free retirement stock.
Here’s how it works: Let’s say you own 1,000 shares of XYZ company, which pays dividends of $0.20 per share on a quarterly basis. And let’s assume that you’ve chosen to reinvest those dividends. When the share price is $100, XYZ pays you $200 (1,000 times $0.20). You reinvest that $200 and are able to purchase two shares of free stock at $100 per share with XYZ’s money.
Now, also consider the fact that you’ll get more free stock when the stock price dips. This is how dividend stocks help minimize an investor’s reliance on stock price appreciation and market volatility. When dividends are reinvested in a time of economic downturn, you are actually purchasing more shares than you would if the stock price were at an all-time high.
Here’s how it works: Let’s take those XYZ shares. What if during a downturn, the stock price drops to $80 per share at the time of the next dividend payment? XYZ still pays you $200. But now you buy 2.5 shares with XYZ’s money because $200 goes further and buys more shares when the stock price is only $80. So the stock market dip equals more free stock for you.
Not only do high-quality dividend stocks make you less vulnerable to market volatility and yield essentially free retirement stock when you reinvest your dividends, they also reduce or entirely eliminate your need to sell off investments in order to generate cash flow in retirement. For you, this means more dividends that result in more free stock.
This kind of compounding can generate that high-yield cash crop we’ve been talking about.
The key, however, is building a high-quality dividend stock portfolio that can deliver safe dividend growth over time.
Which Is More Important: Finding Free Retirement Stocks or High-Quality Retirement Stocks?
For many investors, free stock is especially attractive when capital is limited. But capital restrictions aside, investing in high-quality retirement stocks is where retirees will see the most return on their efforts and investment.
So, how do you find high-quality retirement stocks? Good question.
Defining Characteristics of High-Quality Retirement Stocks
To understand what constitutes a high-quality retirement stock, you can get a few ideas for your 401(k) or Roth IRA from Warren Buffett, the CEO of Berkshire Hathaway (NYSE:BRK.A).
The Oracle of Omaha has steadily invested in companies with a sustainable competitive advantage in their industry. And then, he holds onto them for the long haul.
In his 2020 letter to investors in Berkshire Hathaway, Buffett warns investors that many investing “illusions” exist. Investors who rely only on stock price when determining the quality of a stock might soon find out that the “emperors” of such stocks have no clothes.
To find high-quality growth stocks, look for mature companies with well-established businesses and steady, predictable growth as well as a long history of paying and growing dividends.
It’s also important that the company has a competitive advantage in its industry.
Take a Look at the Dividend Aristocrats
Investors and retirees don’t have to recreate the wheel in order to find these high-quality stocks. Luckily, there is a group of stocks that are renowned for dividend growth; they are known as Dividend Aristocrats.
The Dividend Aristocrats are a list of 65 companies that are part of the S&P 500, have paid dividends for at least 25 consecutive years, and have raised their dividends for at least 25 consecutive years.
These stocks are reliable industry leaders that have experienced reduced volatility in recent years.
Build Your Retirement Portfolio With High-Quality Stocks
So maybe retirement stocks that are technically free won’t get you far, but they can get you started. Those stocks that are essentially free through dividend reinvesting, however, can help build a very secure nest egg for retirement.
Retirement planning is about the long game, not short-term wins. Selecting high-quality dividend stocks from a variety of industries is an effective way to build diversification into your retirement portfolio and to earn over the long term.
To find some of the best high-quality stocks for retirement and leverage dividend investing in order to receive “free” retirement stock, subscribe to Investors Alley’s “Dividend Hunter” newsletter.