Retiree Income Portfolios Hit Rough Patch: Why It's Happening And What To Do

First, a retiree portfolio can take many forms from 1) mostly just bonds, or 2) balanced dividend stocks/ETFs together with bonds, or 3) diverse income asset classes. For those retirees unfortunate to have been largely allocated to only bonds, this allocation has taken the biggest hit over the past several weeks. While many advisors have recommended that retirees diversify their sources of required income with portfolio growth components to offset the risk of inflation and rising rates, many retirees still hold 100% bonds.

Unfortunately holders of a mix of different bond categories like Treasuries, Municipals and/or Corporates are suffering with their portfolio barely treading water year-to-date: SPDR Barclays Municipal Bond (TFI) -1.09, iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG) +1.45% and iShares U.S. Treasury Bond ETF (NYSEARCA:GOVT) +0.10%. Thus, it is important to identify what is working with retirees given a high concentration portfolio of bonds clearly isn’t anymore.

Second, for those retiree portfolios holding a more balanced allocation of both high dividend stocks or dividend ETFs together with bonds have certainly fared better than those holding just bonds, but the amount of superior relative returns depends on what type of equity dividend stocks your portfolio is exposed. For example, traditional sources of high dividends for retirees have been stable industry/sectors such as Consumer Staples and Healthcare, but these sectors aren’t participating in the current bull market.

Indeed, while the S&P 500 (NYSEARCA:SPY) is currently up over +12.5% year-to-date, in contrast individual stock dividend favorites for stability have been exposed to lackluster sector weakness such as in Consumer Staples Sector (NYSEARCA:XLP) which is up by only +4.63% and the Health Care Sector (NYSEARCA:XLV) which is down -2.6%. Here, retirees would fare better with broader index of high dividend ETFs, such as the largest player being Vanguard Dividend Appreciation Index Fund ETF Shares (NYSEARCA:VIG), which is up around +12.5%.

With a more balanced portfolio a retiree would essentially be flat on the bonds, but with a dividend equity ETF they would largely mirror the S&P 500 for that allocation weighting. The combined allocation should at least be showing mid-single digit positive traction for that type of allocation this year. However, for many retirees with higher weightings to typically safer dividend stock plays like Consumer Staples and Healthcare, then their portfolios are probably rather more muted for returns versus a diversified dividend ETF for the equity component.

Third, those retirees holding a diverse source of retiree income – including bonds, preferred stock, REITS and MLPs – are likely experiencing portfolio growth, but underperforming the more traditional balanced portfolio of a high dividend ETF combined with diverse bonds. For example, portfolios holding other asset classes such as iShares U.S. Preferred Stock ETF (NYSEARCA:PFF), Alerian MLP ETF (NYSEARCA:AMLP) and Vanguard REIT Index Fund ETF Shares (NYSEARCA:VNQ), which have returned -0.08%, +10.8% and +5.5%, respectfully, year-to-date would have outperformed the retiree 100% bond portfolio, but underperformed the balanced portfolio of bonds and dividend ETFs.

The takeaway is that any of the three scenarios would engender a return that would certainly not be as robust as the S&P 500 and this is why retirees might be feeling frustration as the media hypes all the equity index new highs. Also, some retirees might also be questioning if their stable stocks are the right choice, since certain equity sectors such as Healthcare and Consumer Staples have been lackluster compared to the S&P 500. Should they chase returns, following the money sector rotation? Let’s look under the hood of the S&P 500.