Advisors Can Combine High-Dividend Strategies With A Pivot To Income-Generating Strategies 10 Years Before Retirement To Diminish Risk
By David Scranton
April 9, 2025
https://wealthsolutionsreport.com/2025/04/09/high-dividend-stocks-are-the-key-for-advisors/
I still remember when I shifted my investment philosophy from growth to income and how it set me on a path to create a multi-billion-dollar financial services firm focused on teaching other advisors to do the same.
When I became a financial advisor, I wanted to help everyday investors who may have never earned six figures but were steadfast enough to contribute to a retirement fund now approaching $1 million in assets. It was a respectable figure, but not large enough to incur much risk. Back then, I was like many advisors who focused on an equity-based investment portfolio focused on growth.
Then came 1999, when I sensed a correction was on the horizon as price-earnings ratios across the Standard & Poor’s 500 approached 40. I felt that recovery would be long and that my clients near retirement would not have the luxury of waiting it out. This started an investment approach focused on income-generating investments and my reputation as “the income guy.”
Stocks still have a role in my investment portfolios, but more from the standpoint of individual preferred stocks. For clients within a decade of retirement, an actively managed, institutional-style money management approach with a primary focus on income has become key to success. Here’s why:
Diminishing Risk
There was a time when a well-known mutual fund family claimed its investment strategy had an 85% success rate in a Monte Carlo simulation. While some may take comfort in that figure, I would balk at the prospect of a 15% failure rate. It hardly seems reassuring if an advisor says you have a 15% chance of running out of money during retirement — yet that’s exactly what traditional methods suggest. Take the prevailing belief that retirees can withdraw as much as 4% of retirement principal each year with a 90% chance of having money after 30 years. That’s a 10% chance of depleting the entire retirement fund.
As a pilot and flight instructor, I can’t help but compare this to air travel. Imagine boarding a flight where the pilot announces, “Ladies and gentlemen, we are pleased to inform you that you have an 85-90% chance of arriving at your destination alive. We hope you enjoy your flight!” No rational passenger would stay on that plane, nor should they.
Just as passengers trust a pilot with their lives, clients trust financial advisors with their financial livelihoods. Why would we advise them to test such risky odds?
Say a client has $1 million and plans to retire in 10 years. Most financial advisors utilize a balanced growth rate of 7%. That gives the client roughly $2 million after a decade, but only if the growth rate holds. If this had been 2000, it would have been 13 years of market downturns, and the portfolio could have dropped to about $800,000 by 2010, making the odds of depleting the retirement fund much greater.
Develop An Income-Based Strategy
The tipping point for my investment philosophy came from realizing that high-dividend stocks are generally less volatile than growth stocks, while bonds typically exhibit even less volatility. Many annuities, in turn, are less volatile than bonds, meaning that income-oriented investments can reduce overall volatility and risk.
My research found that dividends contribute to nearly 40% of the stock market’s total return over a long period. Considering the stock market averages 10% to 11% returns over time, one might incorrectly assume that the average market dividend yield is around 4% to 4.5%, but this is not the case. The current dividend on the S&P Index is a third of that.
Investors who focused on growth stocks in 2000 would have seen little gains after 13 years due to market volatility. However, investors who consistently reinvested a 4% dividend every year would have acquired 52% more shares during that time. And because they would have bought more shares when prices were low, the increase in share ownership could have been as high as 70% to 80%. Consequently, while growth investors were breaking even, this strategy could have been up by 70% to 80% due to the additional shares acquired through dividends.
The 10-Year Transition
Let’s look at math another way. Take a client who is a decade away from retirement. In today’s interest-rate environment, $1 million would generate roughly $50,000 in annual income, net of fees. Reinvest the $50,000, and it could grow 5% each year. After a decade, the client’s income would have compounded to $80,000.
What happens if interest rates fall and the net yield drops to 4% after fees? In that case, the same $1 million dollars would generate $40,000 in annual net income. Reinvesting that for 10 years at a 4% annual growth rate would result in $60,000 of income.
These two investment strategies – utilizing high-dividend stock strategies and transitioning to income-generating investments a decade before retirement – can be key to becoming an income-generating advisor. It’s why many of the financial advisors I mentor consistently bring in between $50 and $100 million of new assets every year.
David Scranton is CEO and Founder of Sound Income Group and author of “Attract & Grow: The Financial Advisor’s Blueprint for Attracting $50 Million in Annual Assets.”
