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Rethink Equities in Retirement

To help address longevity risk, investors need a strategy that includes dividend-paying equities.

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We believe the best way to help investors who are seeking to bridge the gap between income and longevity is to rethink the role of equities in retirement.

 

Actuarial findings show that in 30% of couples aged 65, one person will be alive in 30 years. And in 8% of 65-year-old couples, one person will live to age 100.

New retirees have a variety of adjustments to make, including moving into the distribution phase of investing. They can no longer look primarily for return, but have to give consideration to income and preservation.

The time-tested strategy of shifting toward dividend-paying equities for retirement investors — and not solely toward bonds and other fixed income securities — can help address longevity risk.*

*ThinkAdvisor, Savita Iyer-Ahrestani. “The Actuaries: Longer Client Life Spans Require Big Shift From Advisors,” January 2015.

Making a Retirement Income Portfolio Last Percentage of rolling periods when investment was not depleted after 30 years of distributions (1956-2015)

Equities preserve a greater percentage of initial investment during withdrawal periods.

Based on hypothetical $500,000 initial investments in the Ibbotson Large Company Stocks Index (as measured by inclusion within the S&P 500 Index) and/or the Ibbotson Long Term Corporate Bonds Index (as measured by inclusion within the Citigroup Long Term High Grade Corporate Bond Index), portfolio rebalanced annually, with monthly withdrawals totaling $20,000 (4%), $25,000 (5%) and $30,000 (6%) annually, increasing 3% each year to account for inflation, over rolling 30-year periods from 12/31/56 to 12/31/15. Investors cannot invest directly in an index.

 

Dividend-paying equities can help address market and longevity risk for investors in retirement. Eliminating equity exposure entirely can limit growth potential. Instead, when seeking income in retirement, we believe a meaningful exposure to equities should be maintained but with a shift from growth to dividend-paying stocks.

Companies that have consistently paid and grown dividends over time have been able to mitigate the tradeoff between market and longevity risk because they have tended to:

  • Reduce the overall volatility in portfolios as investors near and move through retirement.
  • Provide the potential for capital appreciation to help investments grow even while investors take withdrawals in retirement.
  • Offer potential to conserve the initial investment.

Dividend-Focused Funds: Striking a Careful Balance Between Volatility and Growth Average annualized returns over rolling 20-year periods from 12/31/70 to 12/31/15, reflecting an initial investment of $500,000 with monthly withdrawals of 5% the first year increasing 3% each year thereafter.

chart-div-focused-funds-scattergram-2016-464x286

Source: Capital Group, based on the Lipper category average, which represents all of the Equity-Income and Growth-and-Income Funds in the Lipper category. Results are calculated by Thomson InvestmentView. Volatility is calculated at net asset value, using annualized standard deviation (based on monthly returns), a measure of how returns over time have varied from the mean; a lower number signifies lower volatility. Past results are not predictive of results in future periods. Your financial advisor will determine the appropriate share class and withdrawal rates for your retirement income investments based on your unique situation.

 

Instead of looking only for Value stocks, consider searching for dividend payers across multiple fund categories by using the following screens:

  • Look at each fund’s oldest share class
  • Search for Allocation and Equity funds
  • Find funds with a yield greater than or equal to that of the S&P 500 (in a majority of periods)*

* For example, over a rolling 10-year period, funds with a yield greater than that of the S&P 500 more than 50% of the time

Screening for Dividend Payers

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Dividend-paying equities are an 80-year fad at American Funds. Most of our dividend-focused funds have delivered better results than their benchmarks (see scattergram). In addition to providing better results, our dividend-focused strategies have done so with less volatility than their benchmarks.

We’ve found that multi-asset dividend strategies have offered:

  • historically higher returns,
  • lower volatility and
  • downside resilience.

As part of a broadly diversified portfolio, these funds, which offer a blend of equities and fixed income securities, can produce a compelling risk-reward framework that can be an appealing option for investors in retirement.

Dividend-Focused Funds Historically Offer High Relative Returns and Low Volatility

For rolling 20-year periods beginning 7/31/87 through 12/31/15, reflecting monthly withdrawals of 5% the first year, increasing 3% each year therafter

Read important investment disclosures

American Funds’ dividend-focused equities experienced higher returns with lower volatility over benchmarks.

Volatility is calculated at net asset value using annualized standard deviation (based on monthly returns), a measure of how returns over time have varied from the mean; a lower number signifies lower volatility.

1Results are for hypothetical $500,000 initial investments in American Balanced Fund (AMBAL), American Mutual Fund (AMF), Capital Income Builder (CIB), The Investment Company of America (ICA), Capital World Growth and Income Fund (WGI), Washington Mutual Investors Fund (WMIF) and the indexes, with monthly withdrawals totaling $25,000 the first year and increasing 3% each year. Rolling results assume month-end start dates for 20-year rolling periods since CIB’s inception on 7/30/87. MSCI ACWI ex USA excludes the U.S. From 7/31/87 through 3/31/07, the MSCI EAFE Index was used because the MSCI ACWI ex USA did not exist. From 7/31/87 through 12/31/87, the MSCI World Index was used because the MSCI ACWI did not exist. MSCI World Index reflects dividends net of withholding taxes, and MSCI ACWI and MSCI ACWI ex USA results reflect dividends gross of withholding taxes through 12/31/00, and dividends net of withholding taxes thereafter.

2Data shown for return and volatility are since first full month after fund inception on 3/26/93.

 

 


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

This material is intended for use by financial professionals or in conjunction with the advice of a financial professional.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. 

Past results are not predictive of results in future periods.