|by Nicholas Atkeson and Andrew Houghton, AdviceIQ|
So Baby Boomers, heading into retirement and leery of risk, will unload their stocks – and deflate the equities market for a long time, right? Don't bet on that. For reasons ranging from low bond yields to estate planning, they'll likely stick with stocks, especially those paying nice dividends.
Of the 314 million people who live in
Wealth led to increased savings. Financial innovations – notably the 401(k), individual retirement account, mutual fund and discount retail brokerage firm – helped direct much of the nation's savings from banks into stocks.
Baby boomers are beginning to retire. Standard operating procedure for many retirees is to move savings away from growth assets (stocks) and to income assets (bonds). There are even target date mutual funds that mechanically make that shift, without regard to market conditions, to arrive at a bond heavy weighting by the specified date, usually when the investor wants to retire.
But now market strategists fear retiring Baby Boomers will want to sell their shares en masse and become a headwind for stock valuations for many years.
Here are the factors that make such a sell-off unlikely to happen:
First, interest rates are low and may stay low for a long time. Normally, as the business cycle migrates from recession to recovery, policy makers raise interest rates to manage accelerating inflation. The Great Recession ended in
The Federal Reserve intends to keep rates low for an extended period. In early June, the
The current yield on the 10-year Treasury is roughly 2.5%. A AAA-rated tax-free municipal bond with a 10-year term has a yield of about 2.2%. With inflation running at roughly 2.1%, the real rate of return (nominal yield less inflation) on 10-year Treasuries and municipal bonds is 0.4% and 0.1% respectively. A five-year U.S. Treasury offers essentially a negative 0.5% return currently.
Faced with low yields from fixed-income investments, Baby Boomers may have to continue to own stocks as a way to capture income from dividends and capital appreciation. The yield on the Standard & Poor's 500 is currently 1.85% and the stock market offers principal appreciation over time.
The top 50 highest paying S&P 500 dividend paying stocks selected from an equal weighted position in all 10 S&P 500 industry sectors has a current dividend yield of about 3.2%. Not only are stock dividend yields attractive relative to bond yields, but S&P 500 corporations are raising dividend payouts. Last year, dividend payouts increased 11.8%. In late May, McDonald's announced plans to return up
Second, the Baby Boomers may not be as old as we think. While they are moving into the last third of their chronological lives, they are just now reaching the halfway point of their investment lifespans, assuming they became net savers at about age 30.
The median age for the demographic group is 58. According to a recent Gallup poll, the average age when Americans expect to retire is 66, up from 63 in 2002. Based on
Third, the Baby Boomers who own stocks are a minority of wealthy households. If they did unload their stocks, the impact wouldn't be as deep as some fear.
Fourth, the stock-owning Boomers want their portfolios to keep growing to pass on to their heirs. The
Wealth is concentrated at the top. Many of these affluent households have multi-generational wealth and investment horizons that far exceed the 16-year average retirement time frame. With a long-term view, transitioning aggressively to fixed income at a time of low rates is not appealing.
Finally, the Baby Boomers are no longer the biggest kids on the block. For the first time since 1947, America's most common age is no longer part of the Boomer generation.
Year-to-date, the top 50 dividend paying S&P 500 stocks equally weighted across the 10 S&P 500 industry sectors appreciated by over 8%, nearly 70% more than the S&P 500 total return index (including dividends). Much of the reason for the out-performance of high dividend paying stocks is the decline in fixed-income yields.
Demographic trends typically last for decades. It is possible, all else being equal, that the Baby Boom generation supports dividend-paying stocks for years to come.