Is Relying on High-Dividend ETFs for Retirement Safe? Experts Warn of '3 Major Risks' in Living Off Dividends: You're Betting Your Asset Safety

Taiwan's stock market continued its upward trend on the 22nd, opening and closing higher. The weighted index rose 592.91 points, closing at 44,825.78, up 1.34%. Financial writer Wang Po-ta posted on Facebook, warning that a retirement strategy focused solely on dividend income may blind investors to market realities, causing them to miss crucial signals to reduce withdrawals when necessary—sometimes without even realizing they should.

By the time the gap in portfolio value becomes too large to hide, investors may have already withdrawn far more than they should have for several years.

Can You Retire Comfortably Without Ever Selling Stocks?

Wang pointed out a common retirement plan promoted in many financial communities: selecting high-dividend ETFs to live off dividends while never selling stocks for a stable retirement. The core belief in this plan is 'never selling stocks.' Because you don’t sell, you can’t incur losses; because you don’t sell, your retirement fund remains intact; because you don’t sell, you can sleep soundly.

But what if this very belief in 'never selling' actually makes retirement planning more fragile?

Wang noted that both Wade Pfau, a leading U.S. retirement researcher, and Jonathan Guyton, a practical financial advisor who developed the 'Guardrail Withdrawal Strategy,' have highlighted the same issue: when 'never selling stocks' shifts from a preference to a rigid rule, it begins to dominate all financial decisions.

How Does 'Never Selling' Hijack Financial Decisions?

Wang explained that if the ironclad rule is 'never sell,' then retirement income has only one source: dividends. From that point on, every investment decision becomes trapped by the same question: Does this stock pay dividends? How much? What if it’s not enough? Then you switch—replacing a 3% yield stock with a 5% one. Still not enough? Switch again to 6% or 7% yield assets. Actively managed high-dividend funds and ETFs also cater to investor demand by adjusting their stock selection strategies accordingly.

Wang emphasized that when retirement income depends solely on dividends, every investment choice is hijacked by the question: 'Does it pay dividends? How much? What if it’s not enough?'

He cited financial advisor Jonathan Guyton’s term for this phenomenon: 'the tail wagging the dog'—where investment decisions are no longer based on 'what is a good investment,' but are instead reversed and driven by 'needing more cash flow.' He gave a compelling example: Warren Buffett’s Berkshire Hathaway never pays dividends, yet no one would argue it’s not an excellent investment. If your stock-picking criterion is 'must pay dividends' or you only invest in high-dividend ETFs, you automatically exclude companies like Berkshire, which is clearly unreasonable.

Wang explained that when the 'never sell' rule forces investors to chase higher yields, a chain reaction of problems begins. U.S. retirement expert Wade Pfau identified three progressively worsening risks:

1. Portfolio Concentration: High-yield stocks are often concentrated in financials, telecom, utilities, and traditional industries. Chasing yield leads to overexposure in these sectors, causing portfolios to drift significantly from broad market composition.

2. Hidden Risks in Bonds: Some investors, seeking more stable income, shift to long-term bonds or high-yield corporate debt. However, long-term bonds are more volatile in price, and high-yield bonds tend to fall during stock market downturns due to rising default risks in economic recessions.

3. Trading 'Higher Current Income' for 'Greater Future Risk': Pfau’s conclusion is that those pursuing yield sacrifice tomorrow’s asset safety for today’s cash flow stability. And we may not even realize it’s happening—because dividends keep arriving monthly, everything appears normal.

Do High-Dividend ETFs Really Never Sell Stocks?

Wang clarified that the idea of 'receiving dividends without ever selling stocks' is technically invalid for high-dividend ETF investors. Analyzing the dividend composition of 0056 ETF over the past four quarters reveals that in the past year, it distributed a total of NT$4.082 per share. Of this, only NT$1.36 came from actual dividends paid by its holdings. The remaining NT$2.72—about two-thirds—came from proceeds generated by the fund selling its holdings.

This isn’t a one-off anomaly; it’s a consistent pattern across all four quarters. High-dividend ETFs rebalance their holdings every six months, requiring the sale of removed stocks. If these sales generate profits, they may be distributed to investors under the label of 'dividends.'

Therefore, selling stocks has never actually stopped. It’s just not the investor doing the selling—it’s the fund doing it on their behalf, then labeling it as 'dividend' on statements. Investors haven’t avoided selling stocks; they’ve outsourced the act and repackaged it under the reassuring name of 'dividend.' The problem is, once outsourced, investors lose control. When to sell? How much? In which tax year to recognize gains? All these decisions are made by the fund. More importantly, investors lose the ability to adjust their withdrawal strategy based on market conditions.

Wang illustrated this with a hypothetical scenario: two people each had NT$20 million at the beginning of 2022. One used the guardrail strategy, the other relied solely on high-dividend income. In 2022, 0056’s dividend increased from NT$1.8 to NT$2.1—a 17% rise. Yet, its total return (including price changes) was -18.67%.

The guardrail strategy forces investors to confront reality—even if it’s painful. The 'dividend-only' strategy, however, hands investors cash that makes them feel the year was decent. Not seeing the truth is the most expensive risk in retirement withdrawals. Because people won’t slow down when they should, or even realize they need to. By the time the portfolio’s shortfall becomes undeniable, they may have already overspent for years.

What Should a More Stable Retirement Rely On?

If 'only dividends, never sell' shouldn’t be a rigid rule, what should a stable retirement withdrawal strategy be based on? Wang argues the answer isn’t another rule, but a structure:

1. Base Income: Labor insurance pensions and retirement annuities—money that comes in regardless of market conditions. This provides not just cash flow but also psychological permission to spend.

2. Short-Term Buffer: Keep 1–2 years of future expenses in cash or short-term treasury bills. This buffer ensures you don’t have to sell stocks at a market low, even if the market drops for two consecutive years.

3. Total Return Portfolio: Invest the remainder in a diversified portfolio (stocks + bonds) without chasing dividends. When you need cash, sell the asset that’s currently over-weighted—stocks in good years, bonds in bad years. Always sell high, never low. Dividends are still part of the cash flow, but not the only source.

4. Guardrail System: Avoid fixed withdrawal amounts. Instead, review your 'withdrawal rate' annually. Guyton’s method is simple: if the rate exceeds the upper limit, reduce withdrawals by 10%; if it falls below the lower limit, increase by 10%. Like having brakes and a rearview mirror in a car, you always know when to accelerate or slow down.

Wang emphasized that in this four-layer structure, dividends still exist—broad-market portfolios still pay them. The difference is that 'living solely on dividends and never selling stocks' is no longer the sole strategy. Instead, dividends naturally become part of a more comprehensive and resilient system.