Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Safe Withdrawal Rates in May 2026
Transcript
- Lucas: If you're a dividend investor in retirement, the big question isn't which stock pays the highest yield — it's how much you can safely spend without running out of money. And the answer right now, in late May 2026, is a little different than it was a year ago. Luna: Because yields have moved. The S&P 500 is above 7,400, the 10-year Treasury is at 4.57 percent — that changes the math on withdrawal rates. Lucas: Exactly. The classic 4 percent rule, from the Bengen study in the 1990s, assumed a portfolio of roughly 60 percent stocks and 40 percent bonds. Back then, bond yields were around 6 or 7 percent. Today, even with the 10-year at 4.57, that's a full percentage point lower than the historical average. Luna: And dividend yields aren't what they used to be either. The S&P 500 dividend yield is around 1.4 percent. So if you're relying on dividends alone, a million-dollar portfolio gives you about 14 grand a year. Lucas: Right. That's not enough for most retirees. So you have to sell shares, which means you're exposed to sequence of returns risk — the danger that a bad market early in retirement can cripple your portfolio. And that risk is especially acute when valuations are elevated, like now. Luna: So what's a dividend investor to do? You can't just reach for yield, because high-yield stocks often cut dividends in downturns. But you can't ignore income either. Lucas: The trick is to focus on dividend growers — companies with a long history of raising payouts. Take Johnson & Johnson, ticker J-N-J. It's up 2.4 percent in the last five days, and it's increased its dividend for 60-plus consecutive years. The yield is only about 3 percent, but that payout grows faster than inflation over time. Luna: And growth matters more than starting yield if you're withdrawing for 30 years. A stock with a 3 percent yield that grows at 6 percent annually will give you more income in year 20 than a 5 percent yield that stays flat. Lucas: Exactly. And that's where a safe withdrawal rate of 3.5 percent — not 4 percent — starts to look sensible for a dividend-heavy portfolio today. Because with the 10-year at 4.57, bonds aren't offering the buffer they once did. If you're taking 4 percent from a portfolio yielding 3, you're eating into principal from year one. Luna: What about a more conservative approach? Some advisors are recommending a 3 percent withdrawal rate for retirees starting in 2026. Lucas: I've seen that. And it's probably safe. But it might be too conservative if you have a long time horizon. The key is to combine dividend growers with a small allocation to bonds, then use a dynamic withdrawal strategy — spend more when the market's up, less when it's down. Luna: That's the approach that financial planner Michael Kitces advocates. He calls it a 'guardrails' approach. Lucas: Right. And for dividend investors, the guardrails are even more intuitive — you watch your dividend income. If your portfolio's dividend payout is growing, you can increase spending. If it's stagnant or falling, you tighten the belt. Luna: Speaking of which, if this conversation has helped you think about your own withdrawal strategy a little differently, that's really what we're here for. And if you feel like it was worth a coffee, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a tiny thing, but it genuinely helps keep the show independent and ad-free. No pressure ever. Luna: Alright — back to the numbers. Let's look at a concrete example. Say you have a $1 million portfolio in May 2026, with 70 percent in dividend growth stocks and 30 percent in bonds. What does a 3.5 percent withdrawal look like? Lucas: So $35,000 in year one. The dividend growth stocks — think J&J, Procter & Gamble, ticker P-G, up 1.4 percent in the last five days — they yield about 2.5 percent on average. So from the $700,000 equity portion, you get $17,500 in dividends. The bond portion, with the 10-year at 4.57, say you're in intermediate Treasuries yielding 4.5 percent. On $300,000, that's $13,500 in interest. Total income: $31,000. You're $4,000 short of the withdrawal target, so you sell some shares. Luna: That $4,000 shortfall is the risk. Over time, if the dividends grow at 5 percent annually, after 10 years your dividend income from equities goes from $17,500 to about $28,500. Meanwhile, if you're reinvesting half the shortfall each year, the portfolio might hold up. Lucas: Exactly. And that's assuming the market doesn't crash. But if we hit a bear market early, that 3.5 percent withdrawal becomes a lot harder to sustain. That's why I like the guardrails approach: if the portfolio drops 20 percent, you cut spending by 10 percent. Luna: Let's talk about the bond side. The 10-year yield at 4.57 percent is flat month-over-month, but the 2-year yield is at 4.08, up from 4.04. So the yield curve is still inverted but flattening. What does that mean for a retiree? Lucas: It means short-term bonds are paying almost as much as long-term bonds, so you don't have to take duration risk. A retiree can ladder 2-year Treasuries at 4 percent and roll them, getting a decent yield with very low volatility. That's actually a good environment for income. Luna: But inflation is still a concern. The Fed funds rate is at 3.64 percent, flat. If inflation runs around 3 percent, a 4 percent nominal yield gives you a 1 percent real return. Lucas: Right, and that's why dividend growth is critical. Equities give you that inflation hedge. J&J and P&G can raise prices, and their dividends grow. Bonds don't do that. So a portfolio with a mix of dividend growers and short-term bonds gives you both income stability and growth potential. Luna: What about high-yield dividend stocks, like Verizon, ticker V-Z, up 3.4 percent in the last five days? It yields around 5.5 percent. Should a retiree include those? Lucas: Verizon is interesting. But high yield often signals a company with limited growth prospects. Verizon's dividend growth has slowed. For a retiree, a small allocation might be fine, but relying on it for income is risky — if they cut the dividend, you lose both income and principal. Luna: So the sweet spot is probably a mix of dividend growers like J&J, P&G, and maybe a low-cost dividend ETF like SCHD, which is up 2.5 percent in five days. It yields about 3.5 percent and focuses on quality companies. Lucas: SCHD is a great option. It's diversified, low expense ratio, and it tilts toward dividend growth. In a 3.5 percent withdrawal scenario, it gives you a solid foundation. And with the S&P 500 at 7,473, we're not at a bargain valuation, but SCHD's holdings are more value-oriented, so they might hold up better in a downturn. Luna: Let's circle back to the withdrawal rate. A lot of retirees are fixated on 4 percent. Why is that dangerous today? Lucas: Two reasons. First, starting yields are lower. The classic 4 percent rule worked in an era of 6 percent bond yields and 3 percent dividend yields. Today, the bond yield is 4.57, and the dividend yield is 1.4. Second, valuations are high. The CAPE ratio is above 30, which historically predicts lower future returns. If you take 4 percent from a portfolio that's only earning 5 percent nominal, you're eating principal quickly. Luna: And if inflation runs at 3 percent, a 5 percent nominal return is only 2 percent real. So a 4 percent withdrawal is actually 2 percent above real returns. That's unsustainable. Lucas: Exactly. That's why 3.5 percent or even 3 percent is more realistic. And if you can be flexible — spend less in bad years — you can probably go a bit higher. But rigidity is the enemy. Luna: One more thing: the 30-year Treasury yield is at 5.10 percent, down from 5.11. If you lock in a 30-year bond, you get a 5 percent yield for three decades. That's not bad for the fixed-income portion. Why not just go all bonds? Lucas: Because 5 percent nominal is still only 2 percent real if inflation averages 3 percent. Over 30 years, that erodes purchasing power. Dividends from quality companies grow faster than inflation. Plus, equities provide liquidity — you can sell shares if you need a lump sum. With a 30-year bond, you're locked in or you take a price hit if you sell early. Luna: So the takeaway: for a dividend investor retiring in May 2026, a safe withdrawal rate is around 3.5 percent, with a portfolio tilted toward dividend growers and short-term bonds, and a flexible spending plan. Lucas: And the most important variable isn't the starting yield — it's the growth rate of those dividends over time. That's what keeps your income rising even as you spend down. Luna: Good point. I think that's a solid framework for anyone building an income portfolio right now. Lucas: Agreed. And as always, run your own numbers, because everyone's situation is different. But the math today says 4 percent is a stretch, and 3.5 percent with quality dividend growers is a much safer bet.