S&P 500 dividend yield hits record low near 1% and it has some retirees rethinking their strategies

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Retirees have long depended on dividend stocks for a reason: The payouts show up whether or not you sell a single share.

Unfortunately, that plan is now getting harder to pull off because the S&P 500’s dividend yield has been running just above 1%, the lowest reading on record, according to Charlie Bilello, chief market strategist at Creative Planning (1).

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The payouts themselves haven’t shrunk, but yield is dividends measured against price and prices have climbed far faster than payouts. The index crossed 7,700 for the first time in early August and because it weighs companies by market value, it now leans heavily on megacap tech names that pay little or nothing (2).

Steven Yedlin, a 75-year-old retired doctor in East Grand Rapids, Mich., has witnessed this firsthand. He told the Wall Street Journal (WSJ) that he built his portfolio around dividend ETFs and by the time he stopped working, his taxable account was split evenly between dividend funds and S&P 500 index funds (3).

“Not much you can do about the yields,” Yedlin said.

What he could do was change where the money goes. He shut off automatic reinvestment and the payouts now land in high-yield money-market funds — or he gives them to his kids.

Dividends can disappear overnight

Papa John’s and UWM Holdings proved this possibility within two days of each other last week, scrapping their payouts. A dividend will last only as long as the board allows.

The pizza chain told the SEC on Aug. 6 that its board voted to suspend the quarterly dividend beginning in the third quarter, redirecting the cash toward franchise incentives, new point-of-sale technology and supply chain work (4). And looking closely, you’ll see that the decision came out of a rough quarter — revenue fell 8.8% to $482.4 million and North America comparable sales dropped 8.3% — with CEO Todd Penegor conceding the turnaround is “taking longer than anticipated” (5). The board says it will revisit dividends and buybacks once the strategy delivers.

In a similar vein, the parent of United Wholesale Mortgage reported an Aug. 5 second-quarter net loss of $451.9 million on $888 million in revenue, alongside a $2.05 billion investment from Oaktree Capital Management and SFS Group Capital, a vehicle owned by the family of CEO Mat Ishbia (6). That money came in as preferred stock carrying a 10% cash dividend — 13% if paid in kind (7). Shares fell about 35% the next day, CNBC reported (8).

Even when the checks from dividends keep coming, plenty of investors misread what those payments represent.

Finance professors Samuel Hartzmark and David Solomon named the mistake the “free dividend fallacy” (9): Treating a payout as bonus money layered on top of the share price.

In reality, when a company pays $ 1 per share, the stock drops by roughly $1 (10). Collect a $1,000 dividend or sell $1,000 of stock — once taxes and trading costs are counted, you’re in nearly the same place.

Chasing yield anyway has a price, Hartzmark told the WSJ. Those investors tend to end up less diversified, with bigger tax bills, holding dividend stocks they overpaid for (3).

Read More: Millionaires under 43 hold only 25% of their wealth in stocks. Here’s where their money is actually going

Earn higher returns on your savings

When stock prices climb faster than dividends, retirees relying on dividend stocks for income can find themselves in an awkward position. Their portfolios may be worth more, but the income they generate hasn’t necessarily kept up.

That’s where cash can play a bigger role.

While dividend yields have been shrinking, interest rates have remained relatively elevated as the Federal Reserve continues to weigh inflation and the risk of renewed price pressures. The Fed’s July meeting minutes, released in mid-August, also showed that policymakers were considering raising rates as geopolitical tensions in the Middle East threaten to push energy prices higher again.

“Many participants assessed that policy tightening would likely be necessary if inflation did not decline,” stated the summary of the meeting. “Some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2 percent” (10).

For retirees, it creates an opportunity without taking on additional stock-market risk. A high-yield savings account can offer a place to park emergency savings or other cash while still earning interest and maintaining access to the money.

Open a high-yield account

A high-yield account like a Wealthfront Cash Account can be a great place to grow your uninvested cash, offering both competitive interest rates and easy access to your money when you need it.

A Wealthfront Cash Account currently offers a base APY of 3.30% through program banks and new clients can get an extra 0.75% boost during their first three months on up to $150,000 for a total variable APY of 4.05%.

That’s ten times the national deposit savings rate, according to the FDIC’s March report.

Additionally, Wealthfront is offering new clients who enable direct deposit ($1,000/month minimum) to their Cash Account and open and fund a new investment account an additional 0.25% APY increase with no expiration date or balance limit, meaning your APY could be as high as 4.30%.

With no minimum balances or account fees, as well as 24/7 withdrawals and free domestic wire transfers, your funds remain accessible at all times. Plus, you get access to up to $8 million FDIC Insurance eligibility through program banks.

Park idle cash in a CD

After covering your emergency savings, consider whether some of your remaining cash could be set aside for a longer period. A certificate of deposit (CD) allows you to lock in an interest rate for a predetermined term, giving you a clearer picture of how much your money could earn.

That’s different from a high-yield savings account, where the rate can change as the Federal Reserve moves interest rates. With a CD, you’re trading some flexibility for greater certainty. For retirees who are already concerned about squeezed dividend yields, that predictability can be valuable.

For those seeking predictable, reliable growth, a platform like CD Valet can help you find higher-yield options that work for you, whether you’re saving for something soon or building a cushion for the long haul.

CD Valet tracks over 40,000 verified rates from FDIC-insured banks and NCUA-insured credit unions nationwide. Unlike other websites, they show every publicly available rate, ensuring you have a comprehensive view of the market.

Plus, their CD rates are updated continuously, so you can shop, compare and open CDs with ease.

Create a source of passive income

The bigger lesson for retirees may be that income doesn’t have to come from just one place. It can help to build multiple income streams rather than relying entirely on dividends or returns on savings accounts.

The goal isn’t necessarily to abandon dividend stocks — it’s to avoid making any one income source do all the heavy lifting.

Passive income can help create that cushion. Having money coming in from multiple sources could reduce the amount you need to withdraw from your investment portfolio each month, particularly during a market downturn when selling stocks may be less appealing.

Real estate has long been popular among investors looking for income. Rental properties can generate regular cash flow and rents may rise over time, potentially helping income keep pace with inflation.

The catch? Owning a rental property can be anything but passive. Repairs, vacancies, insurance, property taxes and tenant issues can quickly turn a passive income stream into a second job.

For retirees who want exposure to real estate without becoming landlords, crowdfunding platforms such as Arrived let you own shares of rental properties for as little as $100.

To get started, simply browse through their selection of vetted properties, each picked for their potential appreciation and income generation.

Arrived distributes any rental income generated by properties to investors monthly, allowing you to potentially set up a passive income stream without the extra work that comes with being a landlord of your own rental property.

The best part? For a limited time, when you open an account and add $1,000 or more, Arrived will credit your account with a 1% match.

Investors with larger portfolios can expand their real estate portfolio further.

Accredited investors can now tap into this opportunity through platforms such as Lightstone DIRECT, which gives accredited investors access to single-asset multifamily and industrial deals.

Lightstone DIRECT’s direct-to-investor model ensures a high degree of alignment between individual investors and a vertically-integrated, institutional owner-operator — a sophisticated and streamlined option for individual investors looking to diversify into private-market real estate.

With Lightstone DIRECT, accredited individuals can access the same multifamily and industrial assets Lightstone pursues with its own capital, with minimum investments starting at $100,000.

– With files from Godwin Oluponmile.

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Article Sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

Charlie Bilello Blog (1), (2); The Wall Street Journal (3); U.S. Securities and Exchange Commission (4); Papa John’s Investor Relations (5); UWM Holdings Investor Relations (6); Stock Titan (7); CNBC (8), (10); Chicago Booth Review (9)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.