Boomers' dividend stocks take beating from bond yields, with retirement income on the line
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Dividend stocks like utilities are being pummeled amid bond market chaos and the rise of the 10-year U.S. treasury , raising questions for seniors about how to continue meeting their income needs.
While dividend stocks are only part of a diversified portfolio for older investors, many boomers often depend on dividend stocks and funds for at least some of their income. When returns are rocky, it can, understandably, cause some consternation.
Many dividend funds are giving back some of their gains from earlier in the year when bond rates were lower, said Timothy Chubb, chief investment officer at Girard, a Univest Wealth Division, in King of Prussia, Pennsylvania.
Sectors including real estate, utilities, and materials have seen stock prices plummet as bond yields become more attractive and dividend stock yields less attractive on a relative risk-reward basis. For all the concern about bonds, inflows into bond ETFs have been rising. Consider the iShares 20+ Year Treasury ETF ( TLT ): it has taken in over $3.2 billion in net inflows from investors over the past month, according to ETFAction.com.
To be sure, there is a split in the market between investors who continue to pile into ultrashort bond funds, which had record inflows near $20 billion in September, according to Morningstar. And those investors making a bet that the worst in the bond market is over and the yields are too attractive to pass up. TLT's inflows were its largest monthly inflows on record as its yield hit the highest since 2002, according to Dow Jones data.
Boomers, however, shouldn't necessarily give up on dividend-paying stocks. Instead, they should consider several strategies that can blunt the impact of rising bond yields on their income-stock portfolios. Here are a few.
While it can be tempting, financial advisors and strategists caution older investors that before doing anything else, the most important thing is what not to do: simply chase yield.
"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," said Chubb.
Instead, investors should focus more on fundamental earnings growth. In the short term, dividend yields of these companies may look less attractive, but that can change over time as dividends rise and the stock price is likely to be steadier as well. "I'd much rather get a company going up 4% to 5% with another 3% in dividend yield than chasing an 8% dividend yield for a business that's in decline," he said.
Boomers who are buying individual dividend-paying stocks should look at the quality of the company by asking several questions, according to Chubb. Are they able to increase their dividend, and in a way that beats inflation? Is the company growing? Are they borrowing debt to fund the dividend, or are they funding it through the cash flows of the business? The higher-yielding the company, the more debt it has or the more risk that a dividend could get cut in the future, he said. And the more interest rates rise, the more highly levered companies face greater financing risk. "It really comes down to the underlying business," he said.
With dividend ETFs, consider the strategy fund managers employ. ETFs that focus on the highest-yielding dividends in slow-growth sectors such as utilities and consumer staples can be hit harder when rates move higher. So investors might want to look more closely at funds that seek dividend growth versus those that are more focused on high yield.
One example of a high-yield dividend fund is the Invesco S&P 500 High Dividend Low Volatility ETF ( SPHD ), which tracks an index that selects S&P 500 stocks that offer the largest dividends while seeking to minimize volatility. This fund had a one-month negative return of 7.59%. It's up around 4% year-to-date. Consumer staples (18.5%) and utilities (14%) are the No. 2 and No. 3 sectors in the ETF by weight after real estate (20%), according to Invesco data through Sept. 30.
State Street Real Estate Select Sector SPDR year-to-date performance, and State Street Utilities Select Sector SPDR comparison. Other high-dividend yield funds haven't been hit quite as hard.
Vanguard High Dividend Yield Index ETF ( VYM ), for example, chooses securities based on current yield, with only the highest-yielding companies selected, according to ETF Database. That fund has a negative one-month return of 3.85%, though it's up about 11% for the year to date. Its top sectors are financials, industrials and technology, according to Vanguard data as of Aug. 31 (it has not provided a more recent portfolio disclosure).
The iShares Select Dividend ETF ( DVY ) screens for companies based on factors such as dividend per share growth rate, dividend payout percentage rate and dividend yield, according to ETF Database. The fund has a negative one-month return of 6.02%, though it's up 11% for the year to date. This ETF has about 26% of its holdings in finance, followed by utilities (22%) and consumer staples (14%), according to iShares data through Oct. 5.
By contrast, the WisdomTree US Quality Dividend Growth Fund ( DGRW ) has about 35% of its holdings in technology, followed by health care (13%) and communication services (12%), according to WisdomTree data through Oct. 5. Its top four holdings are Nvidia, Microsoft, Apple and Meta Platforms. The fund focuses on U.S. large-cap, dividend-growing companies by applying quality and growth screens. As tech stocks have recently resumed market leadership , it has a negative one-month return of -0.81% and is up 11% for the year to date.
High-yielding dividend stocks may continue to fall out of favor as rates rise. Accordingly, investors might want to look…
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