Economist Wade Pfau’s views on funding retirement, subject of a recent Barron’s article, spurred a lot of comments from readers, including those who believed Pfau erred by not touting the virtues of stocks or real estate investment trusts that have histories of paying high dividends.
Pfau is dubious. Owning stocks that pay a high dividend doesn’t provide the same secure retirement income as owning safe bonds “because dividends can be cut,” he says.
He adds that if retirees are willing to own a broad market index and live off the dividends, that’s a “pretty conservative” strategy. The problem is that the S&P 500 stock index yields only around 1.4% currently, and retirees with a dividend-income strategy typically gravitate to stocks with higher payouts.
“As soon as you move away from a diversified market portfolio, you’re taking on more risk,” says Pfau, a professor of retirement income at the American College of Financial Services.