Slow Earnings Growth Can Squeeze Retirement Income

Low inflation and slow earnings growth mean slow dividend growth.

That’s bad news if you depend on your investment income to fund your retirement.

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Now that we’ve hit mid-June, it’s a good time to take a look as see where income investors stand so far in 2019.

So far, the results are a mixed bag.

If you depend on investment income for your retirement income, the good news is inflation is muted.

After approaching 3% last year, it’s now averaging less than 2%.

retirement income

That’s good news because it means you aren’t spending more money on the same things you must buy every day. Rising costs aren’t eating into your spending power.

The bad news is that those muted inflation expectations means bond yields are falling.

retirement income

As I write, the yield on the 10-year U.S. Treasury bond has fallen to 2.08%. That means that if you’re willing to lock your money up for 10 years, you’ll make about $20 on a $1,000 investment.

That’s probably OK if all you’re worried about is not losing money. If you need the retirement income to live, that’s not much help.

The U.S. economy is also expected to grow by about 2% this year and for the foreseeable future.

That’s not exactly bad news, either.

Steady growth, even if it is slower than years past, helps stocks go up. That means you can probably expect the overall value of your portfolio to continue rising.

But even though the economy is growing, corporate earnings aren’t.

In fact, most analysts expect earnings to be flat-to-slightly-down this year and next. Morgan Stanley analyst Mike Wilson predicts S&P 500 earnings per share will come in at $162 this year and next, after previously forecasting a 5% gain.

Again, that’s a mixed bag for income investors.

One the one hand, that means your current dividends are probably safe. On the other, that means they aren’t likely to grow much.

The best companies pay dividends from free cash flow. While free cash flow can grow thanks to cost-cutting, it usually grows commensurate with earnings.

Otherwise, companies are borrowing money in some form or another to pay growing dividends, which isn’t sustainable.

So, while rising portfolio values are great, if you’re dependent on the income your portfolio throws off, that’s not a good place to be.

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Published by Wyatt Investment Research at