Income Equities and Retirement: How Defensive Equity Income Can Help Fund Your Retirement Needs

Income Equities and Retirement: How Defensive Equity Income Can Help Fund Your Retirement Needs

Time to read: Minutes
Sanne de Boer

Sanne de Boer, PhD, CFA

Director of Quantitative Equity Research

Vincent Costa

Vincent Costa, CFA

Chief Investment Officer, NY Equities

Chrissy Bargeron

Chrissy Bargeron, CFA

Client Portfolio Manager, Equity

While today’s retirees are far more exposed to market risks than previous generations, shifting macro trends have rendered some traditional sources of retirement stability less reliable. Rethinking retirement asset allocation should include a high dividend, low volatility equity strategy.

Executive summary

The decline in defined benefit plans in favor of defined contribution has resulted in those of us planning for retirement shouldering far more investment risks than previous generations. Meanwhile, shifting macro and demographic trends have rendered traditional sources of retirement income less reliable, causing retirees to rethink asset allocation. In this note, we illustrate how the balanced approach of a prudently managed high dividend, low volatility equity strategy can help meet the two crucial needs of retirees: income and capital preservation. This may put the minds of retirees at ease so that they can easily sleep-at-night, rather than fretting over their ability to pay current expenses.

Structural changes in markets and retirement vehicles

Over the past decade more and more corporations have closed or limited defined benefit plans in favor of defined contribution. This change has effectively shifted investment risk onto the shoulders of plan participants, and away from company sponsors. The ever-increasing complexity and risk inherent with investing in today’s market has subsequently led to massive changes in the ways that retirees and those nearing retirement are planning for their futures. Indeed, pensions and social security checks are often not sufficient (or in some cases non-existent) for retirees to comfortably fund their desired lifestyle. Complicating matters further, retirees must also account for two pressing and difficult-to-predict variables.

First, Time Horizon (aka longevity risk): While employed, defined contribution participants are in what is known as the “accumulation” phase. During this phase, capital growth is the primary objective. Upon retirement, they enter the “distribution” or “decumulation” phase, and capital growth is replaced by the need for current income. However, the steady increase in life expectancy since the 1950s has lengthened the duration of the distribution phase, meaning that the need for capital accumulation no longer ends at retirement (Figure 1).

Figure 1. A “Good” Problem to Have, Increasing Life Expectancy (USA) Across Generations
Figure 1. A “Good” Problem to Have, Increasing Life Expectancy (USA) Across Generations

Source: Data was compiled by Our World in Data based on estimates by James C. Riley, Clio Infra, and the United
Nations Population Division.

Figure 2. S&P 500 Drawdowns – 1980 to 2020
Figure 2. S&P 500 Drawdowns – 1980 to 2020

Source: Factset. Calculations based on daily returns of the S&P 500 from 1/1/1980 – 12/31/2020. Past performance is no guarantee of future returns.

Second, Market Risk: Longevity risk forces retirees to balance both current and future income needs with a continued allocation to equity markets. As a result, once withdrawals begin, retirees are more vulnerable to drawdowns in the market. As evidenced in Figure 2, while the S&P 500 rose in price over the past 40 years, the rise did not occur without significant drawdowns. Drawdowns, especially severe drawdowns such as that seen during the Global Financial Crisis when the S&P 500 declined more than 50%, have a larger impact on retirees, who may have less time to recoup losses and run the risk of outliving their assets. A drawdown of greater than 50% is admittedly an extreme outlier, but pullbacks in excess of 20% have occurred approximately once every eight years.

A double-digit drawdown is rightfully concerning to any market participant and often results in emotional distress. This can lead to poor sell decisions at the market bottom, which can exacerbate losses even more, as we will describe later in this article.

Given these risks it is vital that retirees and near retirees find what is often referred to as a “sleep at night strategy”; one that funds their lifestyle but does not keep them up at night fretting over outliving their assets or losing a large chunk of their retirement nest egg.

In this article, we describe a single strategy that targets all three objectives of retirement planning - i.e., current income, capital accumulation, and downside risk mitigation - and provide case studies for best practices.

Figure 3. Historical Bond Yields – 1960 to 2020
Figure 3. Historical Bond Yields – 1960 to 2020

Source: Federal Reserve Bank of St. Louis, Board of Governors of the Federal Reserve System; Monthly data, Not seasonally adjusted

Summary of objectives

Enhance current income

The most immediate and easily identified objective for retirees is the need for income. Upon retirement, paychecks cease to exist, and retirees must meet daily income needs via social security, pensions (AKA defined benefit plans), and (increasingly) defined contribution (DC) plans. Historically, fixed income investments were sufficient to provide the income necessary to meet daily expenses. The steady decline in interest rates since the early 1980s (Figure 3) has made this increasingly more difficult. Gone are the days of double-digit yields; today the 10-year Treasury yield fluctuates around 1-2% and the 10-year AA corporate bond yield fluctuates around 2-3%, at a modest spread, calling into question whether this will sufficiently offset the dual threat of inflation and loss from credit defaults.

Unless retirees are willing or able to adjust their lifestyle and reduce living expenses (an undesirable option), they are forced to seek income elsewhere. The most logical solutions are: (1) an allocation in high yield bonds, which lie further out on the risk spectrum of fixed income, or; (2) seek to enhance income in other asset classes, such as equities. Both options could potentially push retirees beyond their risk tolerance levels.

Capital preservation

An unfortunate side effect of retirees reaching for yield is an increase in market risk, leading us to our second objective of capital preservation in the form of downside protection. As noted above, drawdowns in excess of 20% have occurred approximately once every eight years since 1980. In order to erase a drawdown of this magnitude, a positive return of 25% is required (Figure 4). The positive return needed becomes increasingly larger as the drawdown becomes more extreme (as demonstrated in the chart below). For a retiree who lacks a multi-decade time horizon to recoup losses and is likely drawing down on principal, downside protection is imperative.

Figure 4. Increasingly Larger Returns Required to Offset Drawdowns
Figure 4. Increasingly Larger Returns Required to Offset Drawdowns

Source: Voya Investment Management

Capital appreciation

Even if a plan successfully meets the income and downside protection objectives, longevity risk enhances the potential that a retiree will need to withdraw principal. In order to replenish this principal and continue to meet expenses for an unknown amount of time, capital appreciation is necessary. More importantly, we need to address the need for capital appreciation in “real terms,” meaning that purchasing power remains the same after accounting for inflation. While inflation has been persistently low for quite some time, concerns of an increase are warranted, especially given recent indications by the Federal Reserve (which point to a moderate increase in inflation) and an expected increase in consumer spending post-pandemic, which could drive up prices. Bonds, especially those with longer duration, are inherently unable to keep pace with inflation while equities offer the potential for capital appreciation in addition to offering a degree of inflation protection. In contrast, equities offer the potential for capital appreciation in addition to offering a degree of inflation protection. Figure 5 plots the spread between U.S. equity dividend yields versus 10-year U.S. Treasury and 10-year investment grade bond rates. Even without factoring in inflation, both spreads are nearing or at record highs relative to the 60-year period. Should inflation rise, dividend paying equities have the ability to pass through some of the impact, while the real rates of fixed income will decline, and fail to meet the higher price of the desired life in retirement.

Figure 5. Dividend Yield versus Long Term Rates
Figure 5. Dividend Yield versus Long Term Rates

Source: Voya Investment Management, Robert Shiller, Federal Reserve Bank of St, Louis; Monthly data January 1960 – Dec 2020; yields not adjusted for seasonality. Past performance is no guarantee of future returns.

Dividends to the rescue?

One perhaps obvious solution to the risk/return objectives described above is to invest in dividend paying equities, which supports income, growth, and capital preservation needs. Companies that pay dividends tend to be relatively stable and mature with periodic payouts anchoring the share price. Moreover, dividend payouts signal company confidence in future cash-flows, impose discipline on capital allocation decisions, and are an indicator of management with a shareholder-friendly mindset. Given the stability of these companies, the potential to participate in market appreciation is likely as well. Given this, it sounds like we may have put our night-frights to rest and found a path to a restful night’s sleep!

Not so fast... there may be monsters lurking under the bed

An easy solution would be to allocate capital to a dividend-focused ETF or mutual fund, but investors should be wary of three important risks:

  1. As with all equities, dividend stocks are vulnerable to market risk. Any drawdown in equity markets can lead to a loss of capital.
  2. Dividend stocks may be vulnerable to rising rates. Since stocks are viewed as riskier than bonds, when rates rise, dividends become less attractive, and an outflow from equities (particularly those with higher dividend yields) in favor of fixed income may occur. The outflow from equity can result in a loss of capital, or cause dividend-paying stocks to lag the overall equity market.
  3. Many rules-based dividend strategies are concentrated in yield-friendly sectors such as REITs and utilities. The lack of diversification can lead to higher volatility and potentially higher drawdowns.
Figure 6. Performance by Dividend Yield
Figure 6. Performance by Dividend Yield

Source: Factset; Dividend yield bins rebalanced quarterly; Global Financial Crisis Cumulative returns from 10/31/2007 – 03/09/2009; COVID 2/19/20 – 3/23/2009; Market Returns representative of the S&P 500. Past performance is no guarantee of future returns.

Historically, yield has offered some protection in a drawdown, but an extremely high yield can signal financial distress. Consequentially, in a drawdown or risk-off environment, the highest yielding stocks are likely to fall more sharply (Figure 6). This was seen during the global financial crisis and the COVID-19 drawdown. In both cases, stocks with a dividend yield greater than 4% declined the most. During the GFC, stocks yielding between 1% and 3% provided modest dividend protection. The COVID crisis was different and drawdown was felt across varying yields, but the high yielders again suffered the most. We cannot emphasize enough the importance of focusing on yield sustainability and not solely on yield as a raw number.

Drawdowns are difficult for investors of all ages and phases of life. In addition to a sudden loss of principal, there is the added emotional distress that often leads investors to sell at exactly the wrong time. We recognize that hindsight is always 20/20 and it is only human nature to sell in severe declines (especially if the portfolio is your primary source of income). While this may feel right at the time, the resultant effect of “buying high and selling low” in the decumulation phase of retirement is exactly what “dollar cost averaging” aims to avoid in the accumulation phase by being disciplined about regularly investing your savings in the market. This problem is further exacerbated by the need to periodically draw on principal to generate supplemental income, resulting in what is known “dollar cost ravaging,” or having to sell more of your stocks during market dips.

Perhaps the biggest hurdle to selling at the bottom is deciding when to buy back in, especially when historically a significant portion of the rebound has occurred in the 12 months that followed. To demonstrate this, we evaluated returns one, three and five years after the drawdowns experienced by the S&P 500 dating back to 1980 (Figure 7). As you can see, the biggest jump occurs in the first year, especially in drawdowns of over 40%. Investors who wait to buy back in likely will have missed much of the rebound.

Figure 7. Average Recovery from Drawdown (Annualized)
Figure 7. Average Recovery from Drawdown (Annualized)

Source: Factset; Returns greater than one year annualized. Past performance is no guarantee of future returns.

Introducing defensive equity income

This brings us back to the need for a “sleep at night strategy” that aims to meet the three objectives we discussed at the start (current income, capital preservation, and capital accumulation) and put retirees at ease. This is not an easy task and the most obvious solutions (high yield bonds or high yielding equities) involve an increase in risk that is often undesirable. Voya’s High Dividend Low Volatility franchise (“HDLV”) seeks to mitigate these risks and provide investors with a single equity solution that directly meets the three objectives through the following:

Introducing defensive equity income

Enhance current income

First, to enhance current income, HDLV must maintain a portfolio yield that is above the benchmark, generally resulting in a yield range between 2% and 4%. However, it does not simply chase high yielding stocks: a proprietary “yield at risk” model evaluates fundamentals such as high profitability, strong earnings growth, and debt coverage2 to determine the financial strength of a company and sustainability of the current yield. The overall goal is to invest in companies with sustainable dividends across all sectors, not just those with high yields to achieve a portfolio with a higher yield than the benchmark.

In addition, HDLV is a sector-neutral strategy and it emulates exposure of the closest broad market benchmark (Russell 1000 Value), which mitigates extreme concentrated exposures to defensive “bond proxy” sectors vulnerable to rising rates. For example, defensive sectors with higher yields (such as utilities, real estate, and telecom) have higher interest rate sensitivity than their high beta counterparts (technology, materials, and energy). By maintaining a sector neutral approach relative to a broadly diversified equity market benchmark, the portfolio is less vulnerable to an increase in rates.

Figure 8. Compounded Returns for High Volatility Stocks are Dramatically Lower due to Volatility Drag
Figure 8. Compounded Returns for High Volatility Stocks are Dramatically Lower due to Volatility Drag

Source: Data shown above represents performance for the Russell 1000 index from 01/01/1997 – 12/31/20. Note that low volatility is defined by the Axioma definition of beta and results are equal weighted and sector neutral. Past performance is no guarantee of future returns.

Provide downside protection

To increase the strategy’s ability to preserve capital and mitigate volatility, HDLV complements the defensive nature of dividend paying stocks with a portfolio beta target (sensitivity to overall equity market returns) of less than 1. Over the long term the combination of lower beta and diversification through sector neutrality results in lower relative volatility and a smoother ride for investors, which should help prevent “panic selling” in a drawdown and avoid the perils of “dollar cost ravaging.”

While low volatility is typically associated with downside protection, it is also one of the alpha drivers in the strategy. In contradiction to traditional market theory, higher-volatility stocks have not historically generated higher returns than their lower-volatility counterparts (Figure 8). In this chart, the compounded returns for high volatility stocks are dramatically lower as a result of the volatility drag. Indeed, a focus on capital preservation historically has boosted capital rather than impeding asset growth. Explanations posited for this anomaly include behavioral finance biases such as speculative preference for lottery-like stocks, and structural limitations often faced by investors on leverage and shorting.

Capital appreciation

We aim to provide capital appreciation at a rate above the broad equity market, a margin of outperformance commonly referred to as “alpha” in the industry. The primary alpha engine for HDLV comes from Voya’s long-standing proprietary sector models, which combine fundamental insights with quantitative capabilities and drive stock selection in the strategy. These models quantify the proficiency of management’s decision-making (e.g., capital structure and allocation), the impact thereof on the business’ operations (e.g., profitability levels and trends), how this translates to sentiment around the company (e.g., price momentum, positive news articles), and the degree to which the company share price reflects this (valuation ratios). A stock that scores well on dimensions material for its sector relative to its peers may offer an attractive investment opportunity. For instance, research has shown that stocks which are valued cheaply relative to earnings or shareholder equity historically have delivered a return premium over the market.3 Similarly, stocks with strong performance over the preceding year tend to keep up this momentum, while stocks with strong profitability have outperformed peers of lower quality.

Voya High Dividend Low Volatility in practice

We have demonstrated how Voya’s high dividend low volatility strategy seeks to meet the risk/return objectives of retirees/near retirees through:

  • Strong upside/downside capture (limit losses first, then participate on the upside)
  • Diversification (avoid overcrowding, sector-neutral positioning to mitigate interest rate risk)
  • Quantitative construction with a fundamental foundation (optimized portfolio to achieve dividend objective with fundamental factor insights)
Quant Model

We now turn to the question of “How can I use this in practice?” Below we outline three case studies for best practices for investors in varying phases of retirement.

Defined contribution plans

Case Study 1: Retirement Income Tier in a Defined Contribution Plan

Historically, when investors reached retirement, they liquidated their 401(k) and transferred assets to an IRA. Today, in order to provide retirement planning resources and reduce fees, many employers now offer a retirement tier option which investors can use in lieu of an IRA. The goal of the retirement tier differs from the goals for participants in the accumulation phase; it ultimately aims to generate income and provide both capital preservation and growth (as described above). Plan sponsors can create a multi-manager lineup to meet these requirements, but this results in fee layering that can eat away returns and is a higher governance approach for the investment committee. Alternatively, HDLV can serve as a strong, cost-effective solution.

Case Study 2: Active Value Fund in a Defined Contribution Plan for Investors in the Accumulation Phase

Perhaps surprising, a defensive equity fund such as HDLV is also beneficial during the accumulation phase. Risk management does not begin when a participant is nearing retirement, rather should be applied during every phase.

Today, participants are now generally faced with two choices in a defined contribution: (1) invest in a target date fund (thus outsourcing risk management) or (2) create their own lineup of funds.

For participants who choose the latter option, simplification of the equity lineup is key. Plans typically offer an active lineup of four managers: large core value, large core growth, SMID core value, and SMID core growth. Within each of these categories, sponsors often seek a single, low-tracking-error, diversified fund with the ability to outperform the benchmark over a full market cycle at low fees. While the income objective no longer takes precedence, the need for diversification, capital preservation, and capital growth remain vital. HDLV’s sector and style neutral approach, combined with the low beta and cost-effective components, make it an attractive alternative for this bucket.

Registered investment advisors

Case Study 3: Registered Investment Advisors: Active Equity Allocation in an IRA or Trust

Finally, we see the need for a strategy like HDLV outside the defined contribution world, following the same rationale as outlined above:

  • IRA:
    • Retirement Phase: HDLV can help meet the need for income, downside protection and capital growth for retirees who choose to transfer funds into an IRA (in lieu of or in addition to the retirement tier).
    • Accumulation Phase: HDLV is also appropriate for IRA accounts belonging to investors in the accumulation phase (just as in a traditional DC plan).
  • Trust Accounts:
    • Finally, the need for income combined with capital preservation and growth may also resonate with trust advisors, whose clients, regardless of age, often rely on the income generated from the trust for daily expenses.


Today’s retirement environment is, indeed, very different from your parents’. Retirees are not only far more exposed to market risks than previous generations, they are finding themselves exposed for longer as longevity grows. No one looks forward to a retirement in which lying awake at night, contemplating how to pay for current expenses without completely draining one’s retirement savings, becomes the norm.

But as the dynamics of retirement have shifted, so too have the tools available. While fixed income was traditionally the go-to asset class, the steady decline of interest rates over the past 40 years has changed that. The days of double-digit yields are long gone, while the comfort level with predictable inflation risks has been slipping away. However, similar to how traditional fixed income is used to diversify equity allocations during the accumulation period, defensive equities can provide diversification of income during the decumulation phase, when enjoying the fruits of retirement. The balanced approach of HDLV – which targets a higher dividend yield than the benchmark while focusing on downside protection and strong upside capture – potentially serves as a crucial element of the sleep-at-night approach that retirees deserve.


1 For country-, regional- and global-level data post-1950, we use data published by the United Nations Population Division, since they are updated every year. This is possible because Riley writes that “for 1950-2001, I have drawn life expectancy estimates chiefly from various sources provided by the United Nations, the World Bank’s World Development Indicators, and the Human Mortality Database.” For the Americas from 1950-2015, we took the population-weighted average of North America, Latin America, and the Caribbean, using UN Population Division estimates of population size.

2 Debt coverage refers to a company’s ability to generate cash flow in excess of cash needed to support debt payments

3 De Boer, S., M. LaBella and S. Reifsteck (2016) “A Taxonomy of Beta Based on Investment Outcomes” Journal of
Index Investing, Vol. 7 (1)pp. 92–115.


This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

Past performance does not guarantee future results.