The Motley Fool

Passive income: how to live comfortably in retirement from dividend stocks

Building a retirement portfolio which can provide a growing passive income may not seem like a simple idea. However, with the stock market offering long-term growth potential and an impressive income outlook, it could be a relatively straightforward means of improving your financial prospects in older age.

Through focusing on the long term, diversifying to reduce risk and reinvesting dividends received where possible, you could enjoy a robust and rising passive income in older age from a portfolio of stocks.

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Long-term focus

At the present time, the risks facing the world economy from coronavirus appear to be relatively high. A range of major companies have reported a slowdown in demand from China, while a shutdown to factories in a number of different locations means that global supply chains could be negatively impacted by the outbreak.

While this may cause investors to focus their capital on less risky assets, such as cash and bonds, taking a long-term approach could be a better idea. For example, if you are seeking to build a portfolio for your future retirement, the recent pullback in the stock market’s price level could be an opportune moment to buy high-quality income shares while they trade on low valuations.

Similarly, if you are already retired and rely on your shares for an income, focusing on the long-term prospects for specific companies, rather than their short-term share price performance, may enable you to capitalise on favourable yields which are available at the present time.

Diversification

Buying a wide range of shares is a simple means to reduce risk. All investors make mistakes when buying equities, with the outcome of all your investment decisions unlikely to be positive all of the time.

As such, whether you are building a retirement nest egg or are already retired, diversifying your portfolio across a wide range of companies could be a shrewd move. Not only does it reduce the risk of a poor performance from one of your stocks impacting negatively on your overall portfolio, it provides you with the opportunity to broaden your holdings to a wider range of growth opportunities which may benefit your passive income level in the long run.

Reinvestment

While it is tempting to spend all of the income you receive from your portfolio, reinvesting it where possible could be a good idea. Reinvesting dividends may enable you to capitalise on the market’s periodic downturns, where share prices offer wider margins of safety and higher dividend yields. It may also mean that your portfolio grows in size at a faster pace so that it is easier in the long run to generate a worthwhile passive income which increases at an above-inflation pace.

Although investing in shares can be viewed as risky by some individuals, they offer a relatively high level of passive income which could grow at a fast pace in the long run. Since many stocks are currently undervalued following the recent stock market correction, now could be the right time to build your retirement portfolio.

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