Best Investments for Retirement

NEW YORK (MainStreet) — Retirement portfolios that include a mix of dividend stocks and other assets can yield retirees the largest returns even when they are making withdrawals each year, according to a analysis.

A portfolio tilted toward the Dividend Aristocrats Index (companies that have raised dividends each year for the past 25 years) beat the competition after testing multiple $1 million retirement portfolios to see which investment mix gives retirees the greatest returns, while delivering an inflation-adjusted income stream, said

An investor who retired in 2000 with a $1 million portfolio divided between the Dividend Aristocrats of 60% and an aggregate bond index of 40% would have had almost $1.8 million at the end of 2013. That even includes withdrawing 4% or about $40,000 each year while adjusting for inflation. The portfolio still came close to doubling despite the annual withdrawals.

That same scenario with an S&P 500 index fund instead of the Dividend Aristocrats would have only been worth $838,000 at the end of 2013 or less than half the Dividend Aristocrats-led portfolio.

Swapping the S&P 500 index fund for a group of more ordinary dividend-paying mutual funds would have been a little better of $1.2 million, but still far less than the Dividend Aristocrats example.

Retirees need an income stream that is also inflation protected and dividend-paying stocks can play a crucial role, said Greg McBride,'s chief financial analyst.

Companies which pay dividends tend to generate "pretty predictable profits," but also operate in larger and slower growing industries, which also experience less volatility in their stock prices, he said.

"Whether you are accumulating a retirement portfolio or living off of it, investors need to minimize volatility and dividend paying stocks provide that especially relative to non-dividend paying stocks," McBride said. "That dividend is an incentive to hang in there during periods of market turbulence because you are being paid to wait."