Dividend? Growth? Both Stock Classes Can Work in Retirement Portfolios

"The decision depends on the client's income needs, risk tolerance, time horizon, tax situation and overall asset allocation," she said.

Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University, is a fan of including dividend-paying stocks in retirement portfolios. He said he considers them an alternative to a portion of the bond allocation in the portfolio.

"The advantage to buying a stock that consistently pays a dividend versus a bond is that bond payments are fixed and don't increase over time," Johnson said. "Dividend-paying stocks not only have a cash flow, but typically that dividend payment increases markedly over time. In addition, stock prices generally rise over extended periods of time."

In fact, in the first quarter, Morningstar's Dividend Leaders Index, which tracks the 100 highest-yielding stocks from a broad basket of consistent dividend payers, climbed by 15.7%.

Dividend Stocks vs. Growth Stocks

Although dividend stocks can often underperform growth stocks, Deitering said retirement portfolios need a mix to lower the risk and increase diversity.

"In practice, many retirement portfolios benefit from exposure to both, with the balance determined by the client's objectives and stage of retirement," she said.

Dividend-paying stocks play an important role in retirement portfolios, but the rationale is often misunderstood, said Mike Casey, president of American Executive Advisors in McLean, Virginia. His practice, Casey said, typically uses dividend stocks for retirees who are transitioning from wealth accumulation to wealth distribution and value a predictable cash flow without having to sell shares during market downturns.

"The most successful applications tend to be with clients who prioritize income stability and downside resilience," he said. "For example, retirees who rely on portfolio withdrawals often appreciate high-quality dividend growers because they have historically provided both income and the potential for rising payouts over time, helping offset inflation."

Casey said he generally cautions against building a retirement strategy solely around dividend yield. A company paying a 5% dividend is not inherently superior to one reinvesting profits to drive growth, he said.

"Total return, capital appreciation plus income, remains the most important metric," he said. "Growth stocks can be particularly valuable for retirees with longer time horizons who need continued portfolio growth to support spending over several decades."

Tax Implications

Tax treatment is another important consideration, said Casey. Qualified dividends are generally taxed at favorable long-term capital gains rates, while non-qualified dividends are taxed as ordinary income, he said.

"Asset location matters," he said. "Placing higher-yielding dividend stocks in tax-advantaged accounts can improve after-tax outcomes. Advisors should also be mindful of how dividend income may affect Medicare IRMAA surcharges and the taxation of Social Security benefits."

Dividend stocks are generally less tax-efficient than growth stocks when held in a taxable account, said Matthew Higbie, managing director of Birchwood Capital in Loganville, Georgia. If dividend stocks and growth stocks achieve the same annualized return, dividend stock investors must pay taxes each year on the dividend income they receive, while growth stock investors can defer tax liability indefinitely, potentially until their death, when heirs would get a step-up in basis, he said.

"For this reason, we help clients understand that long-term total after-tax return is what matters the most," he said. "Even in a tax-advantaged account … we can periodically sell growth stocks to create our own cash flow and thus don't need to own dividend stocks exclusively."