Looking to live off dividend income? Experts highlight a major investment pitfall that retirees should avoid at all costs
As rising bond yields make safer investments increasingly attractive, retirees who rely on dividend-paying stocks for income are facing new challenges. Experts warn that chasing higher yields elsewhere in the stock market could entail greater risks—a particular concern for those in retirement.
According to a report by Moneywise, Timothy Chubb, Chief Investment Officer at Girard—the wealth management division of financial holding company Univest—notes that one of the worst moves a retiree can make is to sell off high-quality dividend stocks at a low price in search of higher yields elsewhere in the market.
Chubb’s warning comes as investors pull capital out of traditional high-dividend sectors, such as real estate, materials, and utilities. With the 10-year Treasury yield hovering around 5.3%, investors can now generate substantial income without taking on the risks associated with equities, making dividend stocks with lower yields appear less attractive by comparison.
Retirees who still wish to derive income from stocks might be tempted to favor companies with higher dividend yields to bridge any income gaps. However, Chubb cautions that this approach carries increased risk: an unusually high yield can be a red flag, signaling that a company is struggling, heavily burdened by debt, or potentially at risk of cutting its dividend—especially as rising interest rates drive up borrowing costs.
Chubb states that he would rather hold a company with a 3% yield and a 4% to 5% appreciation in share price than one offering an 8% yield accompanied by a decline in business performance.
Recent ETF performance illustrates this trade-off: while investors might secure higher yields from stocks with the largest payouts, those same stocks have also experienced the sharpest price declines. The Invesco S&P 500 High Dividend Low Volatility ETF—which selects stocks with some of the highest dividend yields from the S&P 500—fell 7.6% over the past month. In contrast, the WisdomTree U.S. Quality Dividend Growth Fund, which focuses on quality and growth, declined by only 0.8% during the same period; its top holdings include Nvidia, Apple, Microsoft, and Meta.
Other dividend-focused funds prioritize companies that have consistently increased their dividends over the long term. The Vanguard Dividend Appreciation ETF (VIG) includes only companies that have raised their dividends for at least 10 consecutive years, while the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) requires a track record of 25 consecutive years of increases.
Although neither fund was immune to the recent sell-off—with VIG down 2.3% and NOBL down 4.9% over the past month—their emphasis on sustained dividend growth aligns with the recommendations of experts like Chubb.
While Chubb warns against chasing high dividend yields, this does not mean retirees should overlook the unusually high returns currently available in the bond market. As investors age, their portfolios typically become more conservative, and many may already hold a significant portion in bonds.
Fund managers have long used the simple “Rule of 100” to determine the allocation between bonds and stocks: subtract the investor’s age from 100, with the result representing the percentage to be invested in stocks, while the remainder is allocated to bonds. Under this formula, a 65-year-old investor would allocate 65% of their portfolio to bonds and 35% to stocks.
John Bergquist, president of the financial advisory firm Elysium Financial, notes that this is not a one-time allocation; as an investor ages, they should gradually shift capital from stocks into bonds. Matthew Liebman, CEO of the investment advisory firm Amplius Wealth Advisors, says he has begun adding high-quality bonds to his clients’ portfolios. Noting that yields have reached their highest levels in nearly two decades, he cautions against purchasing bonds solely for the sake of yield.
There are trade-offs to consider: while higher yields make newly purchased bonds more attractive, they also drive down the prices of existing fixed-rate bonds and the value of bond funds. For retirees with a significant allocation to bonds, the current rise in yields—though offering better income opportunities—can also lead to losses on bonds that were purchased when interest rates were lower.
While income is a key component of a successful retirement portfolio, it is not the only factor. Liebman and other experts recommend focusing on “total return,” which accounts for both the income generated by a portfolio and the growth in the value of its underlying investments over time.
Rob Williams, managing director of financial planning and retirement income at Charles Schwab, notes that an excessive focus on income can limit an investor’s options and reduce diversification.
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