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.
Don't chase yield
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.
Be selective about stocks, sectors that can beat inflation
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.
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.
Look for a long history of reliable payment growth
High-yielding dividend stocks may continue to fall out of favor as rates rise. Accordingly, investors might want to look for funds that focus more on dividend growth. Within that, they can decide if they want a forward-looking or historic approach and the time frame, said Todd Rosenbluth, head of research and editorial at TMX VettaFi .
Vanguard Dividend Appreciation ETF (VIG), for example, chooses companies based on their history of increasing dividends; only companies that have increased payouts for at least ten consecutive years are included in the fund. This fund has a negative one-month return of around 2% and a year-to-date return of 8.8%.
The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) tracks an index that selects S&P 500 stocks that have increased their dividend for at least 25 consecutive years. The fund had negative one-month returns of 4.9%, but is up 6% for the year, according to ETF Database.
Investors might also consider diversifying with some international funds that offer dividend growth. For example, the WisdomTree International Quality Dividend Growth Fund (IQDG) tracks an index of dividend-paying total market stocks from developed markets outside the U.S. and Canada. The fund has a negative one-month return of 4.48%, and is up about 4% for the year to date.
Yes, consider bonds
Bond rates fell on Tuesday, but buoyed by a 25 basis-point rate hike by the Federal Reserve on Sept. 16 and the expectation of more rate hikes to come, it is hard to ignore bonds with yields at their highest level in more than two decades. Yields on the 10-year Treasury are still above 5%, trading in a range of around 5.2% to 5.3%.
This has led to more opportunities for investors to generate attractive yields in the fixed-income market.
For a buy-and-hold investor, "the safest form of interest is bonds," said Bill Baynard, co-founder and managing director of Novare Capital Management in Charlotte, North Carolina.
With corporate bonds yielding around 6%, up from about 5.5% a month ago, it could be a good opportunity as opposed to a high-yield dividend stock where you won't get your money back until you sell, and if it's down at that time, you lose money, Baynard said. He likes intermediate-duration corporate bonds with a duration of about five years.
"Attractive yields support income opportunities, but tight credit spreads call for selectivity," Franklin Templeton says in its most recent outlook on fixed income. It expects investors to favor "high-quality, short- to intermediate-maturity bonds, with emphasis on security selection, while limiting longer-duration." Municipal bonds also stand out for tax-exempt yields, it said.
Matthew Liebman, founding partner and chief executive of Amplius Wealth Advisors in Blue Bell, Pennsylvania, said he's starting to add high-quality bonds to clients' portfolios. "The yields are as attractive as they've been in 20 years, give or take," Liebman said. Investors who pair high-quality stocks with high-quality bonds can do really well. But he added, "Don't buy anything just for the yield. You need a better reason than that."
Focus on total return and a total market approach
Many older people still focus heavily on income from dividends and interest. Liebman, however, prefers a different approach — a focus on total return. For older clients, this means focusing on a broader investment universe, including growth stocks and international, with some degree of dividend stocks and international stocks to supplement.
During strong markets when growth and international companies are doing better, they sell some of the portfolio's holdings, as necessary, to meet cash flow needs. In weaker markets, they look at short-duration bond assets to meet cash flow needs. "The goal is to always have enough there to have multiple months of cash flow so the client is never concerned where my next transfer is coming from," Liebman said. Another goal is to sell holdings with long-term capital gains for tax efficiency.
If you are heavily focused on dividends for income, things aren't all doom and gloom. According to a Sept. 30 report from State Street Investment Management, dividend funds gathered $5.1 billion in September and $46.2 billion for the year through September.
"Without dividend strategies, factor flows [net inflows and outflows of ETFs that provide exposure to a specific investment factor such as dividends or low volatility] would have been negative in September," according to the report. "In fact, dividend strategies account for 65% of all factor flows this year. That is well above their 48% share of factor assets and reflects strong demand for cash flow and income streams amid limited supply from traditional equity markets, where dividend yields are at record lows. That strength in dividend-focused ETFs has propelled the broader factor category to more than $70 billion of inflows this year. This is the largest annual flow total since 2022's $100 billion," according to State Street.

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