With interest rates still low, investors need to think about new strategies for generating retirement income beyond portfolios heavily tilted toward fixed income.
Among equity income options, investors will likely look at dividend-paying stock ETFs. While equity yields have been historically lower than fixed-income payouts, equities offer more attractive long-term capital appreciation. However, potential investors should be aware that stocks are typically more volatile than bonds, but dividend stocks are typically less volatile than the overall equities market.
Investors looking for income beyond bonds often turn to dividend stocks and ETFs. Potential investors should be aware the tax consequences as well. Dividends are passed through to ETF investors and may be taxed as qualified and ordinary income. The providers will publish the percentage of dividends paid that were qualified at the end of the year. ETFs that rebalance semi-annually or annually will lower the chance of non-qualified dividends.
In addition to dividends, another form of shareholder rewards, buybacks, can help boost retirement portfolios. The PowerShares Buyback Achievers Portfolio (NYSEArca: PKW) is an ETF that can help on that front.
[related_stories]“Whether you’re in retirement or building toward it, you need both gains and income to stay ahead of inflation. And one of the best ways to find solid growth stocks is to zero in on those that regularly buy back their own shares. That’s because buybacks cut the number of shares outstanding, thereby boosting EPS—and share prices,” according to Forbes.
However, there is debate surrounding the merits of buybacks over dividends. At the crux of the problem, stock repurchases could cost future growth, potentially trading short-term performance for long-term gains. According to an analysis of FactSet indices since 2005, companies that spend the most on buybacks in the S&P 1500 have underperformed those that have not had a single buyback, reports Mark Fahey for CNBC. While stock buybacks helped boost gains over the short run, the effect was negative 36 months after a buyback announcement.
However, PKW also offers the potential for dividend growth.
“The Buyback Achievers ETF only yields 1.3%, but its quarterly distribution is on the upswing: in the past 12 months, it’s paid out a total of $0.59 a unit, up from $0.53 in the preceding period,” adds Forbes.
PowerShares Buyback Achievers Portfolio
