32 TIME December 11, 2017
The ViewLooking Forward
ONE INVESTMENT STRATEGY THAT HAS GROWN
increasingly popular, particularly among people who are
either retired or close to retiring, needs to be put out to
pasture, investment strategists say.
And that’s the dividend switch.
For much of the past decade, investors have operated
against the backdrop of two big trends: historically low
interest rates, which have frustrated retirees living off the
income their portfolios produce; and rising equity prices,
which have encouraged risk-taking in the market.
As a result, many investors have been trading in some of
their low-yielding bonds for dividend-paying stocks during
the bull market, with the hope of earning greater income and
enjoying price gains.
This would explain why dividend-paying stocks, which
have historically traded at a discount to the broad market,
are now frothier than shares of companies in the Standard &
Poor’s 500 index of U.S. stocks.
But while the strategy may have worked to investors’
advantage in the early stages of the rally, which began in
2009, strategists say the risks associated with this move are
rising as the bull market ages.
“Stocks are growth-oriented investments that come with a
lot of risks, and bonds are risk-reducing vehicles,” says Lewis
Altfest, CEO and chief investment officer for Altfest Personal
Wealth Management. “You shouldn’t juxtapose the two—
particularly at this time in the cycle.”
IN THE FINAL STAGESof an economic expansion, interest
rates often begin to rise as the recovery heats up. Since early
September, yields on 10-year Treasury notes have jumped from
2.04% to 2.38%. Meanwhile, the Federal Reserve is expected to
raise short-term rates another quarter of a percentage point at a
regularly scheduled meeting on Dec. 13.
Because dividend-paying stocks compete with bonds for
investor attention, rising yields on fixed-income investments
typically make income-generating stocks less attractive.
“Another risk,” says Jack Ablin, chief investment officer
at BMO Private Bank, “is that the dividend itself can be cut,
which you saw recently at General Electric,” the industrial
giant that slashed payouts to shareholders by 50% to shore
up its finances. “Unlike a bond, there’s no obligation for
companies to keep paying dividends,” he says.
Of greatest concern, though, is how a retiree’s portfolio
might be affected if the bull market were to end. While it’s
impossible to tell how long stocks will keep going up, this
bull market is nearing its ninth birthday, which makes it more
than twice as old as the typical rally. Financial advisers fear
that when the market eventually sells off, investors who have
swapped their bonds for stocks will come to realize the real
risks involved in this strategy.
Loading up on stocks
with dividends is risky
in an aging bull market
By Paul J. Lim
The potential of suffering big stock-
market losses is particularly threatening
to older investors who are at or near
retirement, because they will have little
or no time to make up those losses
before they must tap their accounts.
“If you face a downturn at a certain
point just before or at retirement, and
you’re too exposed to stocks, it can ruin
your entire future,” Altfest says.
So what should investors do?
The first step is to revisit their
underlying investment strategies to
make sure they’re adhering to a mix of
stocks and bonds that’s appropriate,
even if that means settling for a little
less income, financial planners say.
But what if retirees simply need
more cash than their bond yields
provide? The best source of cash flow
might be hiding in plain sight. Investors
can simply trim some of their excess
equity holdings and use the proceeds to
fund their income needs.
Ultimately, that may be the safer
strategy. □What $10,000
became in the
2007–09 bear
market:$3,700
if invested in
dividend stocks$10,500
if invested
in bondsILLUSTRATION BY PETE RYAN FOR TIME