There’s no silver bullet for generating retirement income; however, financial advisors suggest that dividend-focused investors should consider diversifying their holdings and income streams.
“Rather than thinking ‘I can only spend dividends that come to me from high-dividend yielders,’ say ‘I need $100,000 a year, and I don’t care whether it comes from dividends, interest payments or capital appreciation,'” said Blair H. duQuesnay, a CFP at Ritholtz Wealth Management.
That’s a step that might require retirees to become comfortable with the idea of selling some of their holdings, either to rebalance and dilute their concentration in dividend-yielding stock or to generate cash flow.
Brandt, for instance, requires retired clients to maintain a pot of cash for near-term needs and to ride out market downturns. They remain broadly invested in the market so as to maintain growth through stocks and keep up with inflation.
“As the cash is depleted, if the stocks are up, you rebalance there,” he said.
If you’re considering investing in dividend-yielding companies, financial advisors recommend thinking about the following points:
Know your risk appetite: Don’t let dividends distract you from the fact that you are still holding stocks and are subject to market risk. “How much market volatility are you comfortable with?” asked Boudreaux. “Can you lose 10 percent to 15 percent of the value in two weeks and still feel good?”
Diversify your strategy: Beware of concentration risk, both in terms of your investments and your income sources. “Some clients have pensions, some have rental income, and there’s Social Security,” said duQuesnay. “The portfolio makes up for the gap.”
Understand your flexibility: If you do hold these stocks, make sure that you have sufficient cash flow to weather companies’ cuts to dividends.
“The more flexibility you have, the more resilient you will be,” said Boudreaux.