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The Case for Generating Retirement Income With a Dividend Strategy

One strategy: Have 80% of a portfolio in stocks, including higher-yielding master limited partnerships and real estate investment trusts, with the remaining 20% in fixed income and preferred shares.

One strategy: Have 80% of a portfolio in stocks, including higher-yielding master limited partnerships and real estate investment trusts, with the remaining 20% in fixed income and preferred shares.

The following is an excerpt from How to Generate Income in Retirement With Dividend Stocks, Barron’s cover story on Nov. 18.

Charles Lieberman, chief investment officer at Advisors Capital Management in Ridgewood, N.J., dislikes the total-return approach to dividend income.

For starters, there’s the “sequence of returns problem,” which is a commonly cited concern among retirement researchers. If, say, an investor’s portfolio runs into a cluster of down years as retirement approaches, it can mean a much lower base of assets on which to generate income.

Making portfolio withdrawals to raise cash when the market is declining is particularly vexing to him, partly because it can mean tapping principal—something many investors are loath to do. “When the market goes down sharply, you have to sell off more assets,” Lieberman says. “When the market recovers, the portfolio is operating on a smaller base, and it potentially never recovers.”

The so-called safe annual distribution, or withdrawal, rate for a retirement portfolio is around 4%, says Lieberman. But even at that rate, he says, there’s a chance a retiree can run out of funds. (Many retirement researchers these days are encouraging a more fluid withdrawal rate.)

So one of his firm’s strategies aims to produce income that keeps up with inflation. The strategy typically has about 80% of its holdings in stocks, in many cases including higher-yielding master limited partnerships and real estate investment trusts, with the remaining 20% in fixed income and preferred shares. Since its inception in 2001, the strategy has had a net annual composite return of 6.8%.

One REIT that Lieberman holds is Medical Properties Trust (MPW), which develops and leases health-care facilities such as hospitals. It yields 5.2%.

Lieberman doesn’t worry about the notion that emphasizing income-producing stocks can lead to dangerous overweightings in value stocks. “I have sufficient knowledge to be able to make some judgments about what sectors—and what companies—can safely provide income,” he says. “I don’t feel like I am required to invest in every sector proportionally.”

David Blanchett, head of retirement research at Morningstar, says there are times when the income approach—even one that’s less diversified—makes sense in retirement.

“Portfolios focused on income are likely to be less diversified than their total-return counterparts, but tend to produce higher levels of income, and may be attractive alternatives to total-return strategies for investors focused on current consumption,” he wrote in a 2015 paper that he co-authored in the Journal of Portfolio Management.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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