Today's retirement planner is faced with countless perplexing challenges. Investors may find themselves with severely diminished capital despite years of saving to secure a comfortable retirement. The odds of running out of money increase as investors live longer and face the potential of higher-than-average long-term inflation. Other traditional retirement income sources, including pensions and Social Security, may not be sufficient when needed, increasing the burden on portfolios to produce more income.

In addition, yields from income-producing investments are at the lowest levels in 50 years. And these problems may become even more challenging as the U.S. deals with the consequences of massive and rising budget deficits.

Advisors are faced with the daunting task of trying to help investors overcome losses and rebuild sufficient capital to meet their retirement income needs. Investing in equities is necessary to capture the higher returns offered through a combination of dividends and price appreciation. Dividend-paying stocks offer retired investors two sources of inflation-fighting protection: from price appreciation (which increases capital balances) and from rising dividend income streams as companies periodically increase payouts to shareholders.

When waging a battle against inflation, investors need to use the right tools. From 1945 to 2010, the 3.93% average inflation rate as measured by the Consumer Price Index has been more than offset by the 6.29% average increase in cash dividends paid by companies in the Dow. The chart below shows a hypothetical investment of $1 in the Dow and the inflation-fighting benefits of rising dividend payouts in the 1945-2010 period versus $1 adjusted annually for increases in the CPI.

These 65 years encompass long-term investment cycles, including protracted bull and bear markets. Over each period studied, increasing dividend income more than offset the rise in the cost of living as measured by the CPI.

Longer life spans mean investors may have to build an asset base large enough not only to generate income, but also to reinvest to keep pace with rising inflation costs. A review of market return dynamics concludes that dividend-paying stocks, not growth stocks, should be the building blocks of the portfolio construction process, especially for retired investors.


Don Schreiber Jr. is CEO and founder of WBI Investments.