Dividend Stocks Can Pay Off For Recent Retirees

By: Jennifer Woods,

Having an allocation to dividend-yielding stocks can be a good move for most investors, but for those who are in or nearing retirement, it’s a must.

Christopher Davis, senior mutual fund analyst with Morningstar, says many newly-minted or soon-to-be retirees are primarily in fixed income investment, and, as a result, risk prematurely running out of money.

“A lot of times people associate retirement with fixed-income investing," says Davis. "They need to be safer since they’re living on that money and need the income which fixed income provides. If you are just starting retirement, you have potentially 20 or 30 more years of life left and you need to be able to continue to grow your nest egg and protect it against inflation.”

Dividend-paying stocks, he says, offer components essential to anyone in this demographic, including a solid income stream, growth potential (for offsetting inflation) and less-than-average volatility for a stock.

Dexter, president, chief investment and chief executive officer of RNC Genter Capital Management, says a substantial allocation to stocks is key and the lion’s share of should be in dividend paying stocks.

“It is necessary just to provide enough income,” he says, adding that bond yields are so low right now—ten-year Treasurys are yielding less than 4 percent—you need to make it up on the equity side, which means having that position in high dividend-yielding stocks.”

"They still feel that bonds are for income and stocks are for growth," explains Genter. "While that may have had some merit in the past when stocks were growing at 20-25 percent. In the current environment, many people would be happy having 10 percent total return and a 4-5 percent.

Tom Huber, manager of T. Rowe Price Dividend Growth Fund, says it’s important that a stock have a good current yield and the the opportunity for good dividend growth over time.

“I look for companies that may not be yielding 4-5 percent or even 6 percent, but have good dividend growth opportunities going forward,” says Huber.

Huber says consumer staples are a good example because the group “is a traditional area for healthy dividends and good dividend growth ... a lot has to do with the stability of those business and their ability to turn out healthy profits in good and bad environments."

One thing Huber cautions investors to be aware of when selecting companies for their dividend allocation is whether the company will be able to maintain the dividend.

“Often when you see a very high yield, you may want to question the sustainability of the dividend,” says Huber. “Take another step in addition to looking at the yield. Look under the covers."