Chasing Dividend Yield for Income: Three Reasons to Be Wary
Financial advisors use a variety of investment strategies to replace retiree employment salaries or business income.
These include bond ladders, systematic withdrawal programs, guaranteed minimum withdrawal benefit products, and even strategies in the relatively new category of target payout funds. But one of the most common approaches is the dividend yield strategy.
In this article
- Reason #1: There’s No Free Lunch
- Reason #2: Dividends Have Been Declining
- Reason #3: Concentration Risk Is Common
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Relying on dividends for income is a strategy that has served investors well in the past. Who hasn’t heard of the proverbial elderly widow living off the steady stream of General Electric (GE) dividend checks? And many investors believe that high-dividend-paying stocks are preferable to low- or non-dividend-paying stocks for portfolios intended to meet income needs.
The dividend yield strategy has been so attractive because it professes to meet the “golden three” outcomes for retirement-oriented investing—income, capital preservation/growth and liquidity. But as markets have evolved and the retirement investing landscape has shifted, is there anything about this strategy that should concern investors?
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