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Retirees: High Dividend Stocks and Investment Risk

  //stocks-investing.news-articles.net/content/202 .. es-high-dividend-stocks-and-investment-risk.html
  Published in Stocks and Investing on Tuesday, November 11th 2025 at 17:18 GMT by The Globe and Mail

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Retirees, High Dividend Stocks and Investment Risk: What You Need to Know

High‑yield stocks have long been a staple of many retirees’ portfolios, promising a steady income stream in a market that is often volatile and unpredictable. The Globe and Mail’s recent feature – “Retirees: High dividend stocks and investment risk” – dissects the allure of these securities, the pitfalls that lurk beneath the shiny payouts, and offers practical advice for investors looking to balance income against safety.

1. The Allure of Dividend‑Rich Stocks

For retirees, the primary goal is often to generate cash flow that can cover living expenses without dipping into the principal. High dividend yields (typically 4 % and above in Canada) appear to deliver that objective. The article explains that during periods of low interest rates, dividend‑yielding stocks often outperform their lower‑yield counterparts, making them an attractive alternative to bonds or savings accounts.

A key driver behind the rise in dividend yields in recent years has been the dividend‑growth model: companies that consistently raise dividends are seen as financially healthy, while those that maintain or increase payouts even during earnings volatility are flagged as particularly resilient. Many Canadian “Dividend Aristocrats” – firms that have increased their dividend for at least 20 consecutive years – are highlighted as a potential safe haven.

However, the piece also underscores a paradox: the very allure of high yields can mask hidden risks.

2. The Risks That Hide Behind the Numbers

a. Unsustainable Payout Ratios

The article cites a 2023 report from the Toronto‑based firm Fidelity that found an increasing number of “high‑yield” Canadian stocks have payout ratios exceeding 70 %. A payout ratio measures the proportion of earnings distributed as dividends. When a company pays out more than it can sustain from operating profits, the dividend becomes vulnerable to cuts if earnings falter.

b. Dividend Cuts During Market Stress

During the pandemic‑era boom, many firms—particularly in utilities and consumer staples—boosted their dividend yields. But as the market turned in 2023, a noticeable number of those same companies reduced or even suspended dividends. The Globe and Mail links to a Bloomberg piece titled “Why dividend cuts are more common than you think” that lists 12 Canadian firms that slashed dividends in 2023, underscoring the reality that a high yield today may not be a guarantee tomorrow.

c. “Yield Traps” and Sector Concentration

The feature explains the concept of a “yield trap,” where a stock’s price collapses, artificially inflating its dividend yield. If the underlying business fundamentals have deteriorated, the yield is likely to normalize at a lower, less attractive level. The article also warns against over‑concentration in a single sector; for instance, utilities and telecoms dominate many high‑yield portfolios, exposing investors to regulatory, technological, and rate‑of‑return risks.

d. Inflation and Real‑Return Erosion

High dividend income can appear attractive on a nominal basis, but when inflation rises, the real purchasing power of those dividends shrinks. The Globe and Mail cites a Bank of Canada research note noting that inflation above 4 % erodes real returns of a 5 % yield stock by roughly 1 % per year.

3. How to Evaluate a Dividend Stock’s Sustainability

The article lays out a three‑step framework for assessing whether a dividend‑rich stock is a reliable source of retirement income:

1. Payout Ratio & Cash Flow Adequacy
   Examine the company’s cash‑flow‑to‑dividends metric and ensure the payout ratio sits in a reasonable range (ideally 30 %–60 %). Companies with higher ratios often rely on borrowing or one‑off earnings to support dividends.

2. Earnings & Revenue Trends
   Consistent revenue growth, stable profit margins, and a history of earnings resilience signal a healthy dividend payment. The Globe and Mail refers to Morningstar’s “Quality” rating as a useful shorthand for identifying financially robust firms.

3. Dividend History & Growth
   Look for a track record of dividend increases, especially during downturns. The article cites Dividend King status (at least 50 consecutive dividend increases) as a red flag for reliable income.

4. Strategies for Risk‑Mitigated Income

While individual high‑yield stocks can be tempting, the Globe and Mail’s writers advise a diversified, systematic approach:

• Low‑Cost Dividend ETFs
  Exchange‑traded funds that hold a basket of dividend‑paying stocks can dilute individual company risk. The article highlights Vanguard’s Canadian Dividend ETF (VDV) and iShares S&P/TSX 60 ETF (XIU) as examples.

• Staggered Income Streams
  Combining dividend income with a fixed‑income ladder or annuity can provide a more predictable cash flow, especially if market conditions shift.

• Regular Portfolio Review
  Set a quarterly check‑in to monitor payout ratios, earnings trends, and any corporate announcements that might signal a forthcoming dividend cut.

• Tax‑Efficient Structures
  For retirees who have maxed out their Registered Retirement Savings Plans (RRSPs) or Tax‑Free Savings Accounts (TFSAs), the article suggests using a Non‑Registered account with a Dividend Reinvestment Plan (DRIP) to keep tax‑deadlines predictable.

5. Bottom Line: Income Is Not a Guarantee

High dividend stocks can indeed generate a respectable income stream for retirees, especially in a low‑interest‑rate environment. But as the Globe and Mail’s feature concludes, “a high yield is not a safety net—it’s a potential lever that can pull you down if not managed properly.” The key takeaway: invest with an eye on sustainability, diversify across sectors, and remain vigilant to market signals. By doing so, retirees can harness the benefits of dividends while keeping the risk of abrupt income loss at bay.

Additional Resources

• Bloomberg’s article “Why dividend cuts are more common than you think” (linked in the Globe and Mail piece)
• Bank of Canada’s research on inflation and real returns
• Morningstar’s “Quality” rating guide for dividend investors

These references, along with the Globe and Mail’s own insights, offer a comprehensive toolkit for retirees aiming to build a resilient income portfolio out of dividend‑rich equities.