‘The worst thing that a retiree could do’: Don’t make this dividend stocks move right now, experts warn

Chubb’s warning comes as investors have pulled back from traditional dividend-heavy sectors, including real estate, materials and utilities. With the 10-year Treasury yielding around 5.3%, investors can now earn attractive income without taking on the risks associated with stocks, making lower-yielding dividend payers less appealing by comparison.

For retirees who still want income from stocks, the temptation may be to make up the difference by pursuing even higher-yielding dividend companies. But Chubb warns this can introduce more risk because an unusually high yield can be a sign of a struggling company, heavy debt or a payout that may eventually be cut, particularly as higher interest rates make borrowing more expensive.

Chubb said he would rather own a company gaining 4% to 5% while paying a 3% dividend than a declining business yielding 8%.

Recent ETF performance helps illustrate the trade-off. Investors may collect more income from the highest-yielding dividend stocks, but those stocks have also suffered some of the steepest recent price declines.

The Invesco S&P 500 High Dividend Low Volatility ETF, which selects some of the highest-yielding stocks in the S&P 500, fell 7.6% over the past month. By comparison, the WisdomTree U.S. Quality Dividend Growth Fund, which focuses on quality and growth, lost just 0.8% over the same period. Its largest holdings include Nvidia, Apple, Microsoft and Meta Platforms.

Other dividend funds place greater emphasis on companies with a long history of increasing their payouts. The Vanguard Dividend Appreciation ETF (VIG) includes only companies that have raised dividends for at least 10 consecutive years, while the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) requires 25 consecutive years.

While neither fund has been immune to the recent selloff — VIG fell 2.3% over the past month and NOBL lost 4.9% — their emphasis on consistent dividend growth reflects what Chubb and other experts recommend.

Where bonds fit now

Although Chubb warned against chasing yield in stocks, that doesn’t mean retirees should ignore the unusually high returns now available in the bond market. Many likely already have substantial exposure to bonds, since portfolios typically become more conservative as investors age.

Fund managers have long used a simple “rule of 100” to determine the allocation between bonds and stocks, subtracting an investor’s age from 100 to determine the percentage that should be held in stocks, with the remainder going to bonds. Under this approach, a 65-year-old would hold 65% of their portfolio in bonds and 35% in stocks.

“Keep in mind that this isn’t a one-time allocation,” John Bergquist, president of Elysium Financial, told Kiplinger. “You need to consistently be moving funds from (stocks to bonds) as you age.”

Of course, the rule of 100 is only a guideline, and the appropriate mix depends on factors including income needs and time horizon. Still, today’s higher yields give retirees an opportunity to generate more income from the bond portion of their portfolios.

Matthew Liebman, chief executive at Amplius Wealth Advisors, told CNBC he’s starting to add high-quality bonds to his clients’ portfolios. “The yields are as attractive as they’ve been in 20 years, give or take,” he said, though he cautioned, “Don’t buy anything just for the yield.”

However, there is a trade-off. Higher yields make newly purchased bonds more attractive, but they also push down the prices of existing fixed-rate bonds and the value of bond funds. For retirees with a sizable bond allocation, the same rise in yields that creates better income opportunities today can also mean losses on bonds purchased when rates were lower.