The Role of Dividend Growers in a Retirement Portfolio

Over the last few days, several clients replied to our note about our CIO Martin Fridson’s Reuters article on dividend “aristocrats.” 

The core idea Marty highlighted is intuitive: if inflation stays stubborn, income strategies that only maximize today’s yield can lose purchasing power, while businesses that raise dividends over time may help your income keep up. He illustrated this with a simple contrast between a fixed-rate bond bought in 2015 and a dividend grower stock, whose dividend rose meaningfully over a decade, lifting “yield on cost” as the payout grew.

That framing is useful, and it sparked a fair question: should retirees shift from bonds/preferreds into dividend growth stocks. The right answer is more nuanced than “yes” or “no,” because dividend growers can improve an income plan, but they can also create hidden risks if they are treated like a bond replacement.

What dividend growth stocks are, and what they are not

A dividend is not free money. It is a cash distribution that comes from the same corporate resources that could have been reinvested in the business, used to reduce debt, or returned to investors through share buybacks. So, the decision is not “dividends versus no dividends.” The decision is which companies can sustainably share cash with shareholders while still funding a healthy business.

Dividend growth stocks are still equities. They can fall sharply in market drawdowns, and the dividend does not protect you from price risk. Dividend growth stocks can also disappoint on total return versus the broad market in some periods, even if the income stream rises. In some cases, dividends and share buybacks can and will be cut in order to honor other obligations, such as bond payments.

They should be viewed as a way to make the equity sleeve of a retirement portfolio more resilient and more cash-generative over time, not as a substitute for the stability that bonds and cash reserves provide.

The real problem retirees are trying to solve

Most retirement blowups are not caused by owning the wrong “income product.” They are caused by being forced to sell equities to fund spending after a decline, which locks in losses and reduces the base that must recover. Dividend growers can help reduce the need to sell shares, because part of the return shows up as cash distributions.

That benefit matters most when it is paired with a plan that ensures you are not relying on dividends to pay next month’s bills. 

Use a “bucketing” strategy for retirement

A simple bucket framework makes dividend growth more effective because it clarifies what each part of the portfolio is responsible for.

• Bucket 1 is near-term spending cash, typically sized to cover roughly 12 to 24 months of withdrawals.

• Bucket 2 is spending stability, usually high-quality fixed income, preferred shares, and cash-like holdings intended to fund the next several years of withdrawals with low forced-selling risk.

• Bucket 3 is long-term growth, diversified equities designed to outpace inflation over time and refill the earlier buckets when markets cooperate.

Dividend growers belong primarily in Bucket 3. Their job is to raise the cash generation and quality profile inside the equity sleeve, while Bucket 1 and Bucket 2 protect you from having to sell equities at the wrong time. When markets are down, you draw income from Bucket 1 and Bucket 2, giving Bucket 3 time. When markets are strong, you refill Bucket 1 and Bucket 2 by trimming equities, including dividend growers, which is disciplined rebalancing instead of reaching for yield.

“Aristocrats” are a good screen, not a guarantee

Marty points out that the S&P 500 Dividend Aristocrats have historically grown dividends faster than inflation over the last decade, which is the attraction in an inflation-sensitive world. 

A long record of dividend increases is a meaningful signal. It suggests management discipline, business durability, and a culture that prioritizes shareholder returns. But it is not a promise. Industries change, competition shifts, and even great companies can overpay dividends or take on leverage that later squeezes flexibility. So we should treat the “aristocrat” label as an entry point for research, not a conclusion.

Underwrite dividends like credit

The best way to avoid dividend traps is to analyze the dividend the way you would analyze a borrower’s ability to make payments. Cash flow coverage matters more than headline yield. Payout ratios matter because they show whether the company has room to keep investing and still raise the dividend through a weaker year. Balance sheet strength matters because high leverage can turn a dividend into a discretionary luxury at exactly the wrong moment.

Cyclicality matters because earnings that swing with the economy tend to make dividend policies fragile when recessions arrive. Capital allocation matters because a company that buys back stock aggressively at high valuations can weaken future dividend capacity.

Valuation matters because an excellent dividend grower can still be a poor investment if you pay too much for it. This is how you keep dividend growth investing from turning into “yield chasing with nicer branding.”

Concentration is the quiet risk

Dividend growth portfolios often tilt toward specific sectors. That is not automatically bad, but it becomes dangerous if it turns into a few crowded exposures that all react the same way to a macro shock. High yield is frequently a sign of stress, not generosity. A retiree-focused dividend growth sleeve should favor businesses that can keep paying and keep raising, not businesses that are paying a lot because the market is worried.

What is the right allocation for retirees

For most retirees, dividend growth stocks should be a slice of the total portfolio, not the whole “income portfolio.” A practical target range is about 15% to 30% of the total portfolio in dividend growth equities.

That range is typically enough to improve long-run income growth potential and portfolio quality characteristics, without turning the plan into a bond substitute or a concentration bet. Investors with high guaranteed income, low withdrawal needs, or very conservative risk profiles should lean toward the more lower part of the range.

By contrast, longer time horizons, higher equity tolerance, and the use of dividends primarily to reduce share sales rather than fund near-term spending, make the case for the upper portion of the range.

The takeaway

Marty’s Reuters piece usefully reframes “income investing” around purchasing power, not just today’s yield. Dividend growers can absolutely play a role in that objective, but only when they are treated as equities, sized appropriately, and integrated into a bucket plan that prevents forced selling.

Our default approach is to keep bonds doing bond work, keep cash doing cash work, and use dividend growth stocks as part of the equity sleeve.