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Is 60/40 Rule Dying? Dividend-Heavy ETFs for Retirees

Sanghamitra Saha

As one comes to an end of his/her income period and retirement ushers in, a smart allocation of assets is needed in order to enjoy a regular stream of income. Earlier, a rule of thumb was followed for retirement corpus, which said that the stock part of one’s portfolio should equal 100 minus the retiree’s age. For example, if an investor retires at 60, 40% of his total savings would go to stocks and the rest to bonds.

But in a research note published by Bank of America Securities titled “The End of 60/40,” portfolio strategists Derek Harris and Jared Woodard claimed that “there are good reasons to reconsider the role of bonds in your portfolio,” and to allocate a greater share toward equities, as quoted on MarketWatch.

“The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” Harris and Woodard went on to say.

Bubble in Bonds?

Prolonged U.S.-China trade tensions, failure of long-drawn-out easy money policies in jumpstarting several developed economies, renewed global growth slowdown, Brexit uncertainty and pressure in the oil patch left the broader market edgy and triggered a safe-haven rally this year. This has brought down the benchmark treasury yields materially. This went in favor of bond prices.

Investors should note that since bonds have been doing pretty well in the past two years, a “bubble” fear in the bond market can’t be ignored. iShares 20+ Year Treasury Bond ETF TLT, which yields around 2.28%, in fact, offered 13.5% returns in the past two years (as of Oct 17, 2019). This was against 15.8% returns offered by the SPDR S&P 500 ETF SPY, which yields 1.83% (read: Top Leveraged ETFs of Q3).

Time to Shift to Dividend-Heavy ETFs?

Bank of America suggests thatinstead of U.S. government debt, investors may consider investing more in equities, “particularly stocks with high dividend yields in underperforming sectors, including financials, industrials and materials, which can be bought at inexpensive valuations.”

As most of the developed economies and some emerging economies are following easy money policies of late, cheap money should propel stocks higher. Also, dividend stocks perform well in a low-rate environment. Notably, “there are now 1,100 global stocks that are paying dividends above the average yield of global government bonds.” So it makes sense to bet on some high-dividend ETFs at the current level.

Global X SuperDividend ETF SDIV – Yield 9.39%

The underlying Solactive Global SuperDividend Index tracks the performance of 100 equally weighted companies that rank among the highest dividend yielding equity securities in the world. The index-provider applies certain dividend stability filters. The fund charges 58 bps in fees.

Invesco KBW High Dividend Yield Financial ETF KBWD – Yield 8.79%

The underlying KBW Nasdaq Financial Sector Dividend Yield Index is a dividend yield weighted index seeking to reflect the performance of approximately 24 to 40 publicly listed financial companies engaged in the business of providing financial services and products, including banking, insurance and diversified financial services, in the United States.

Legg Mason International Low Volatility High Dividend ETF LVHI – Yield 4.25%

The underlying QS International Low Volatility High Dividend Hedged Index is composed of equity securities of developed markets outside the United States with relatively high yield, and low price and earnings volatility while mitigating exposure to fluctuations between the values of the U.S. dollar and other international currencies.

Global X SuperDividend Alternatives ETF ALTY Yield 7.90%

The underlying Indxx SuperDividend Alternatives Index tracks the performance of the highest dividend yielding securities in each category of alternative investments, as defined by the Index Sponsor. BDCs and Private Equity (24.1%) and REITs (24.09%) are the top two sectors of the fund (read: 5 High-Dividend ETFs Available Under $20).

WisdomTree Emerging Markets Dividend Fund DVEM – Yield 3.56%

This emerging-market fund puts heavy weights on China (22.35%) and Taiwan (21.84%). The fund has double-digit weights in financials (21.91%), information technology (21.59%) and energy (11.3%) (read: ETF Asset Report of Q3).