Dividend-paying stocks, particularly in the utilities and real estate sectors, are experiencing significant headwinds as bond yields surge, raising concerns among Baby Boomers about sustaining retirement income. The 10-year U.S. Treasury yield has climbed above 5%, making fixed-income instruments increasingly competitive relative to equity dividends and causing a re-evaluation of portfolio strategies for older investors.
Timothy Chubb, chief investment officer at Girard, a division of Univest Wealth, noted that many dividend funds are erasing gains made earlier in the year when bond rates were lower. The shift is driven by investors seeking the relative safety and attractive yields of bonds. Data from ETFAction.com indicates that the iShares 20+ Year Treasury ETF (TLT) has attracted over $3.2 billion in net inflows over the past month, reflecting a broader trend where retail investors are making contrarian bets on the bond market.
While inflows into ultrashort bond funds approached $20 billion in September according to Morningstar, long-duration Treasury ETFs are also seeing record interest. TLT recorded its largest monthly inflows on record, with yields hitting levels not seen since 2002. Despite the pain for dividend-heavy portfolios, State Street Investment Management reported that dividend funds gathered $5.1 billion in September alone, with $46.2 billion flowing in through the first nine months of the year.
Financial advisors caution that retirees should avoid selling high-quality dividend payers at depressed prices to chase higher yields elsewhere. “The worst thing that a retiree could do is sell a high-quality dividend payer at depressed prices to chase income somewhere else in the stock market just to get higher yield,” Chubb said. He advocates focusing on fundamental earnings growth, preferring a company with a 4% to 5% growth rate and a 3% dividend yield over an 8% yield from a declining business.
Selectivity is crucial as investors navigate rising rates. High-yield funds concentrated in slow-growth sectors like consumer staples and utilities have faced steeper declines. The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD), for instance, saw a one-month negative return of 7.59% and holds significant weight in real estate, utilities, and consumer staples. In contrast, funds with a growth orientation, such as the WisdomTree US Quality Dividend Growth Fund (DGRW), have been more resilient, posting a modest -0.81% one-month return and holding top positions in tech giants like Nvidia, Microsoft, Apple, and Meta Platforms.
Experts also recommend looking for companies with a long history of reliable dividend growth. Funds like the Vanguard Dividend Appreciation ETF (VIG), which requires ten consecutive years of dividend increases, and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), targeting 25 years of increases, offer different risk-return profiles. VIG recorded a -2% one-month return, while NOBL dropped 4.9% over the same period, though both remain positive year-to-date.
Bonds remain a viable option for income generation. Bill Baynard, co-founder of Novare Capital Management, described bonds as the “safest form of interest” for buy-and-hold investors. With corporate bonds yielding around 6%, Baynard suggests intermediate-duration corporate bonds offer attractive opportunities compared to high-yield dividend stocks, which carry the risk of capital loss if sold during a downturn.
Matthew Liebman, CEO of Amplius Wealth Advisors, is beginning to add high-quality bonds to client portfolios, noting that yields are as attractive as they have been in two decades. However, he warns against buying solely for yield, emphasizing the need for a sound investment thesis. Liebman advocates for a total return approach rather than a singular focus on dividend income. This strategy involves diversifying across growth stocks and international markets, adjusting asset allocation based on market conditions to meet cash flow needs while maintaining tax efficiency through strategic capital gains realization.
Leave a Reply