One strategy that is often preferred by retirees is to tilt toward income-producing, or dividend-paying stocks, instead of investing more broadly in the stock market. However, there have been some stong criticisms of following this strategy, such as this one from Larry Swedroe
Despite the criticisms of the dividend stock strategy, there may be another reason to consider dividend stocks in a retirement decumulation portfolio -- lower estimation risk. It may be that there is less uncertainty in estimating the volatility and returns of high dividend stocks than for the broad equity market. First, since dividends provide a relatively non-volatile floor for total equity returns, this implies there should be relatively less uncertainty about their future returns. Additionally, it also seems to be the case that the earnings of higher dividend-paying companies are more stable than for stocks in general, as discussed in this article, and this also implies lower estimation risk.the popularity of high-dividend strategies has driven the valuations to levels that certainly are no longer value-oriented. This changes the nature of the fund in terms of what investors should expect in terms of returns.
Unfortunately, it's almost a certainty that most investors are unaware of this impact. You know longer have this excuse. As I warned yesterday, buyer beware.
If higher dividend-paying stocks do in fact have lower estimation risk than stocks in general, then this is an important factor for retirees to consider who are trying toWe find that the reported earnings of dividend-paying firms are more persistent than those of other firms and that this relation is remarkably stable over time. We also find that dividend payers are less likely to report losses and those losses that they do report tend to be transitory losses driven by special items.
optimize a SWR strategy for their individual situation.
This topic is examined in some detail in this paper from Geoff Considine. He refers to the strategy of investing in the broad stock market as the total-return strategy, and the strategy of investing in dividend stocks as the income-oriented strategy. He summarizes his conclusions as follows:
http://advisorperspectives.com/newslett ... _Rates.php1. Total-return-oriented portfolios have higher expected return and higher estimation
error than income-oriented portfolios.
2. The SWRs for total-return strategies are higher than for income strategies, but they
are more likely to require revisions and adjustments due to changes in the projected
equity risk premium.
3. Income-oriented strategies will provide lower SWRs but with a lower probability of
downward adjustments to the withdrawal rate, because they are less likely to
require substantial selling into a declining market (one of the worst scenarios for
4. Portfolios designed to optimize total return but with a threshold income level that
must be satisfied (as in my third scenario above) are a compromise solution.