A lot of retirees have gone through this thought process in the last few years:
I’m retiring. I need income to supplement my Social Security.
In the old days, you could have cash in the bank, in CDs, and get 6-7% a year. Now you get zero.
So people turned to government bonds, but the yield on tens is now about 1.6%.
So people turned to corporates, but even high-quality high yield is only getting you 5-6%. And junk bonds are…not safe, by definition.
So the solution for a lot of people was to go into stocks. High-dividend stocks. Like telecoms and utilities and consumer staples. In other words–safe stocks.
So the trade has gotten a bit crowded. Even if that were the only thing, it would be cause for concern. Grandma shouldn’t be in stocks for retirement, safe or not.
A lot of research has been done on equity returns and what people have found is that stocks with “value” characteristics (like low price/book ratios) have outperformed most of the time. And dividends are desirable, because compounded dividends, reinvested dividends that grow over time account for most of the return of stocks. That is counterintuitive, because dividends are triple-taxed, and it isn’t rational for companies to issue them. But not all things in finance are rational, and by having a good payout ratio, it shows that you have real, live cash flow that you can return to shareholders.
Source: Forbes (05 September 2016)