Rethink Equities in Retirement
To help address longevity risk, advisors need a strategy that includes dividend-paying equities.
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.*
Making a Retirement Income Portfolio Last Percentage of rolling periods when investment was not depleted after 30 years of distributions (1956-2015)
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.
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)*
Screening for Dividend Payers
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