Retirees, High-Dividend Stocks Are No Substitute For Low-Yield Bonds

For many retirees, Social Security and pension income are insufficient to fund their cash-flow needs. Consequently, they must take additional income and/or drawdowns from their portfolio. In today's low-interest-rate environment, many retirees have attempted to increase portfolio income by replacing low-yielding bond funds with funds that own high-dividend-paying stocks. I consider this to be a flawed substitution strategy.

Some people believe that owning dividend-paying stocks is less risky than owning a more diversified stock portfolio because they offer a regular stream of income. But the historical data does not support this idea. Last year, 423 stocks in the S&P 500 Index paid dividends. The average annual return for these stocks was 14.0%. The non-dividend payers returned 14.4%. Similar results occurred in 2013.

Source: Market Watch

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