Why Ignore Low Yield Stocks When Planning Retirement?

Image Source: PixabayWhy do people ignore low yield stocks when planning retirement? In one sentence: because they complicate retirement planning.Nobody wants to figure out how many shares to sell each year on top of getting their dividends, their pension income, and other resources. After all, “low yield stocks don’t pay the bills.” Or do they? Also, many investors often think that retiring on low-yield stocks can be dangerous. Let’s explore these reasons for ignoring low-yield stocks to see if they hold any water.

Low Yield Stocks Don’t Pay the Bills
To assess this reasoning for ignoring low yield stocks, let’s take look at this scenario as an example. Let’s say you invested $10,000 in Alimentation Couche-Tard (ANCTF) and $10,000 in Visa (V) in 2013, both low yield, high growth stocks. In May 2013, you bought:

Ten years later, those shares were recently seen trading at $66.01 and $231.30, respectively.In 2013, let’s say you also invested the same amounts in AT&T (T) and Canadian Utilities (CDUAF), companies offering higher yields, and you reinvested their dividends to buy more shares.Today, your portfolio would be worth almost $150,000 — of which 123,000, 82% of the portfolio value, is invested in the low yield stocks mentioned. By selling a few shares as needed, these low yielders pay the bills quite nicely.

I Don’t Want to Sell Shares to Generate Income
Why not? The more income you get from selling shares, the less dividend income you have to generate from your portfolio.Continuing with our earlier example, imagine you retire today with these four stocks. You stop reinvesting the dividends, and you instead want to live off your dividends. Let’s take look at your dividend income:

Stock

Yield * Current value in
portfolio (May 2023)

Annual dividend amount

ANCTF

0.85% * $67,920 =

$577.32

V

0.77% * $55,110 =

$424.35

CDUAF

4.72% * $14,450 =

$682.04

T

6.81% * $12,360 =

$841.72

Interestingly, the low-yielding stocks generate $1001.67, and the high yield stocks generate $1,523.76. You may say that clearly illustrates that high yield stocks generate more income. I agree. In fact, it’s a little more than 50% more. However, I have $123,000 invested in the first two stocks and $27,000 in the high yielders.If you sell $523 of ANCTF to compensate (fewer than 10 shares), the following year, your ANCTF shares will generate 0.85% * 67,397 = $572.87, or ~$5 less than last year. That is, without considering any capital gain or dividend increases that might occur during the year.You could probably repeat this operation for 100 years and still have money invested in both ANCTF and V. Conclusion: selling low-yield, high-growth shares has a small impact on the ability to generate the basic dividend.One could argue that you could sell your ANCTF and V shares and buy more of CDUAF and T to generate a higher dividend income. Last week’s article depicted the 10-year total returns of 12 U.S. and 12 Canadian high-yield stocks; 66.66% of them either cut their dividends or failed to increase them enough to cover inflation. I don’t like those odds.

Retiring on Low Yielders is Dangerous
I need to address this point loud and clear. Some investors think low yielders are dangerous because their performance comes solely from stock price appreciation. Again, last week’s article made it clear that low-yield, high-growth stocks can offer protection rather than risk.Companies that are growing their revenue and earnings by high-single to double-digits attract investors. In doing so, the trend of the stock price remains solid. The 24 low-yield stocks I picked in that earlier article show convincing results. But on top of strong performance, there are more advantages of investing in them.

Advantages of Low Yield, High Growth Stocks
I’m a big believer in understanding why you hold shares of specific companies and understanding how these companies will contribute to your retirement plan. Let’s see why low yield, high growth stocks perform so well.

Exposure to The Five Factors
If you’ve done any research about market performance, you may have stumbled on academic papers about the five factors that explain most of the stock market return. Interestingly, many financial advisors or dividend adverse investors pull out those studies to tell you that dividends are relevant. According to them, dividend growth is a symptom of a strong exposure to the following five factors:

I’d rather say that dividend growth is the result of thriving companies that are exposed to those factors. The odds of picking a high yielder that is also a thriving company are slim. However, low-yield, high-growth companies usually check many of those boxes.

Long-Term Wealth Preservation
It’s safe to conclude that thriving companies offer great protection for your portfolio. As these companies grow, their share prices increase. It’s just pure logic. Therefore, selecting high-quality companies with a generous dividend growth policy is a better strategy than selecting companies based purely on yield.

Sustainable Income Growth
I’m not telling you to build a portfolio with a yield under 2% after reading this. However, by adding a few low-yield, high-growth stocks, you can increase your chances that your portfolio income grows and beats inflation.Let’s say you retire at 60 and need $50,000 income from your portfolio. Assuming inflation at 2.10%, you’ll need $68,000 from the same portfolio at age 75 and $84,000 at age 85. If your portfolio’s dividends aren’t growing at this pace, even 2% inflation could derail your retirement plan.

In A Nutshell
Don’t ignore low yield, high growth stocks when planning your retirement. Include a few in your portfolio to benefit from their stock appreciation and the protection they offer against inflation.More By This Author:The Death Of Renewables? – September Dividend Income ReportLow Yield, High Growth Stocks For Your RetirementBuy List – October 2023: Essex Property Trust