With interest rates stuck near historical lows, retirees may find it harder to meet their income needs through bonds alone. Instead, more should think about adding dividend-paying stocks and related exchange traded funds to bolster yields.
In a hypothetical case, an investor would likely target a $1 million retirement investment and yield of inflation-adjusted $40,000 a year, or 4% portfolio withdrawal rate, writes Jonathan Clements for the Wall Street Journal.
However, given today’s prices and a 4% withdrawal rate, one would need to put almost $1 in Treasuries for every $1 one hopes to spend in retirement to maintain 27 or 28 years of retirement income, and nothing would be left over if you lived longer.
“Liability matching with bonds is so terribly expensive that most people just can’t afford to do it,” Charles Farrell, chief executive of Northstar Investment Advisors, said in the WSJ article. “You could bump up the income a little by buying corporate bonds rather than Treasurys. But then you have issues with credit quality.”
Alternatively, investors can consider dividend stocks instead. Farrell suggests investors try to ignore price appreciation and focus on the dividend aspect.
“If you put together a portfolio of good blue chips, you might start with a yield of 3%,” Farrell added. “You have to train your brain to ignore the price movement. You want to focus on the income production and the growth of that income.”
Decent dividend-paying stocks have more attractive yields, with yields on benchmark 10-year Treasuries hovering around 2.13%. Moreover, dividends have stayed ahead of inflation. Over the past 50-years, the S&P 500’s dividends have increased an average 5.7% per year, compared to the average 4.1% inflation rate.
The dividend stock plays may also enjoy dividend growth, along with capital appreciation, which could also help an investor maintain his or her nest egg longer. Consequently, with a larger portion of retirement money invested in dividend stocks, an investor would not be forced to withdraw, or sell off assets, from his or her portfolio as quickly to meet annual income needs, assuming if total yields fall short of the target 4% withdrawal rate. [ETF Options to Generate Income for Retirement]
Investors could utilize dividend-paying stock ETFs to help generate the income they are looking for. For instance, the iShares Core High Dividend ETF (HDV) , which tracks high-quality U.S. companies that have have been screened for financial health and relatively high dividends, has a 12-mont yield of 3.37%. The Vanguard High Dividend Yield ETF (VYM) targets the largest and highest dividend-paying stocks and comes with a 2.84% yield. Additionally, the WisdomTree Equity Income Fund (DHS) , which weights stocks by total expected dividends paid in the coming year, has a 2.99% 12-month yield.
For more information on investing for retirement, visit our retirement category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.