High-yielding dividend stocks can appear to be an attractive source of income for retirees, but can you afford the potential risk exposure?
Economist Wade Pfau warned that owning stocks with a high dividend does not provide the same secure retirement income as owning safe bonds “because dividends can be cut,” Barron’s reports.
On the other hand, if retirees are willing to hold broad market index funds and live off the dividends, it is a “pretty conservative” strategy, but the S&P 500® stock index only yields about 1.4%, and retirees with a dividend income strategy typically steer toward stocks with higher payouts.
“As soon as you move away from a diversified market portfolio, you’re taking on more risk,” Pfau, a professor of retirement income at the American College of Financial Services, told Barron’s.
Pfau argued that seniors couldn’t rely on continued stock market gains to fund their retirements, with the prospects of bear markets potentially erasing their nest eggs. In comparison, younger investors have more time to recoup losses.
Pfau also advised Americans to push off withdrawing from Social Security to maximize benefits. Some may argue that retirees could begin withdrawing at 62, the earliest possible age, and benefit from attractive stock market returns, but Pfau also warned that stock market returns aren’t guaranteed, whereas delaying Social Security provides a guaranteed boost in benefits.
“Obviously, if you get 10% returns [in the market], you’re better off claiming early,” Pfau added. “It’s just, what is the reality of that happening over an eight-year period?”
ETF investors can better manage risk and generate some income along the way through something like the Nationwide Nasdaq-100 Risk-Managed Income ETF (NYSE Arca: NUSI), which seeks current income with a measure of downside protection.
NUSI follows a rules-based options trading strategy that seeks to produce high income using the Nasdaq-100® Index, an index of the 100 largest non-financial stocks on the Nasdaq exchange. The ETF may potentially complement traditional equity and fixed income allocations or function as a possible hedge for investors.
The Nationwide Risk-Managed Income ETF establishes a collar strategy to generate monthly income. Collar strategies involve holding shares of the underlying stock while at the same time buying protective put options and writing calls for the same security. A put option gives its owner the right but not the obligation to sell the underlying asset at a specified price and on a specified date. A call option gives its owner the right but not the obligation to buy that asset instead.
For more news, information, and strategy, visit the Retirement Income Channel.
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
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