Stocks Going Down, Dividend Yields Going Up: Retirement Portfolios Rejoice!

Includes: JNJ, PG, XOM
by: Doug Carey


Stock prices are falling, but this means dividend yields are rising. Who benefits?

This decline could be a good thing for retirement income.

We look at how to analyze the situation in terms of how rising yields impact retirement plans.

Here we go again: The stock market is going down, down, down. But the good news is that dividend yields are going up, up, up!

Just one year ago Exxon (NYSE:XOM) had a dividend yield of 2.9%. But after a stock decline of nearly 30%, its dividend yield is now 3.7%. Johnson & Johnson (NYSE:JNJ) had a dividend yield of 2.7% earlier this year, but now has a yield of 3%. Procter & Gamble (NYSE:PG) had a dividend yield of 2.8% late last year, but now has a yield of 3.3%.

I want to now take a look at how these rising dividend yields might impact a retirement portfolio in the long-run. For those investing for dividends and dividend growth, this could be just what they needed in terms of generating enough income in retirement.

I want to analyze and compare a portfolio of dividend-growth stocks. The old portfolio has a dividend yield of 2.5%. The new portfolio has a yield of 3.5%. I will also assume that dividends grow by 5% annually and the stock price rises by 2% each year.

Starting Yield

Div. Growth

Price Increase

Old Portfolio




New Portfolio




I will also make the following assumptions for a sample couple who is saving for retirement:

Inflation (CPI)


Current Age of Both People


Age Of Retirement


Age When Both People Have Passed Away


Social Security at age 67 (combined)

$40,000 per year

Average Savings Rate

$10,000 per year

Total Investment Balance Today

$400,000 (50% in Taxable, 50% in IRAs)

Recurring Annual Expenses in Retirement


Investment Mix

70% Dividend Growth Stocks,
30% Medium Term Treasuries

Using our personal financial planning software (which is available to the public) I generated results for the plan using the older portfolio with the lower dividend yield. The results are below:

Investment Amount At Retirement


Investment Amount At Plan End


Age Of Shortfall In Funds


Probability Of Never Running Out Of Money


Even though they will have nearly $1 million when they are retired, their money runs out when they are 86 years old. Also, using our Monte Carlo analysis where 1,000 different scenarios are generated each year, we found that the probability that they never run out of money is a dangerously low 32%.

Now let's look at the results with the higher dividend yields:

Investment Amount At Retirement


Investment Amount At Plan End


Age Of Shortfall In Funds


Probability Of Never Running Out Of Money


This looks much better. We project that they will have over $600,000 left at the end of their plan (when they are 85 years old) and the probability of plan success went up by over 30%. This all from just a 1% increase in the dividend yield!

For this couple it still appears that $1.1 million might not be enough for them to retire comfortably. I have written before about analyzing the question how much do I need to retire.

So it's time to make lemon out of lemonades. Interest rates are still historically low, but dividend yields are climbing. The S&P 500 dividend yield is still only 2.1%, while over the last 150 years, the average yield is a much greater 4.4%. If reversion to the mean does occur, we could be in for a wonderful income investing opportunity.

Disclosure: I am/we are long JNJ, PG, XOM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.