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Dividends and distributions are critical components of a modern retirement income strategy. But from which sectors should that income come?

In the market crash that accompanied the first wave of the pandemic in March, 2020, “the traditional sectors did not hold up like we thought,” says Nicolas Schulman, investment advisor, senior vice-president and portfolio manager with the Schulman Wealth Management Group at National Bank Financial Ltd. in Montreal.

“The entire bond sector, which is normally a risk-off sector in portfolio management, tanked,” he says. “That was where we had to start being a lot more alternative and dynamic in the selection of which sectors we wanted to be exposed to.”

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Mr. Schulman says the traditional value stocks – “the Fed Ex and Procter & Gambles of the world” – are starting to come back into trend. But the definition of what’s considered a value stock needs to expand as well.

“The value play could come back, but we have to be more diversified and understand that today a Netflix or a Disney is going to be where the cash flows are,” Mr. Schulman says.

Paul MacDonald, chief investment officer of Harvest Portfolios Group, points to utilities, telecommunications and real estate as areas that would normally be expected to have consistent cash flows.

Smart investing for retirees, amid the wild market moves of late, requires somewhat of a “TINA” approach, he says.

“It means ‘there is no alternative.’ You’re forced, if you need income, to really go into other areas of the investment landscape,” Mr. MacDonald says.

That means no more 40-per-cent bond allocations as investors could actually lose money in the current environment.

“Inflation is hovering below 2 per cent, but if you have a 10-year bond yield that is less than 1 per cent, once you factor in inflation, you actually have negative returns over the period,” Mr. MacDonald says.

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While TINA can mean fewer bonds and more equities, Mr. MacDonald says that doesn’t necessarily require cautious, retirement-focused investors to also accept more risk.

“You really want to be focused on good quality businesses – companies that have proven successes and can weather storms like the one we are in the midst of now,” Mr. MacDonald says. “People should be looking for companies that have proven histories of cash flow and strong dividends.”

He adds that Canadians tend to have a fairly strong home bias – and that needs to change.

“In some areas [of the market in which] retirees would typically go in Canada, the outlook has changed,” says Mr. MacDonald.

Mr. Schulman agrees that if you have to go abroad if you want growth and diversification.

“Today, we have at least 35 per cent of our accounts by weight and risk profile exposed to the U.S. markets, and we overlay that with between 10 per cent and 15 per cent international,” Mr. Schulman says. “You have to expose yourself to the new trends.”

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He mentions the Chinese e-commerce giant Alibaba Group Holding Ltd. as a good option to consider for diversification.

Ultimately, the goal should be trying to find ways of replacing lost bond income without taking on too much risk for your comfort level.

“But there are not a lot of places for both income and security right now,” says Rob Eby, executive financial consultant at IG Private Wealth Management in Winnipeg. “We are now in a world where we are going to be in a low-interest rate environment for many years to come. So, if capital preservation is a concern, people are going to have to take on more equity.”

Part of Mr. Eby’s solution has been to split his clients’ retirement portfolios effectively in two: one for income and another for long-term growth. He said the key to that strategy is regular rebalancing between the two.

“If I’m drawing $1,000 a month out of an RRSP and markets are improving, I will take $12,000 out of the growth portfolio every year and top up the income-protection portfolio,” Mr. Eby says.

For retirees, alternative asset classes can offer promise.

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“One of the best ways to take some risk out of a portfolio today is alternative investments,” Mr. Schulman says. “They could be tech disruptors, private equity or direct plays on income trusts. It really depends on how much you want to de-risk your portfolio.”

His firm was one of the early investors in SpaceX, the privately-held exploration company of Tesla founder Elon Musk. Mr. Schulman says that “we got into that to de-risk our models [because] we wanted to have something that is not correlated to the markets.”

If that risk level still sounds astronomical, Mr. MacDonald says certain health care stocks could provide stable long-term income.

That too, requires retirees to look outside their home market. “There really is no health care in Canada for investment,” Mr. MacDonald says.

In particular, he points to large, diversified pharmaceuticals and some of the more diversified medical device companies.

“These are companies with structurally sound medium-and-long-term guidance,” he says. “Their cash flows have been very consistent and growing.”

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Advertising feature produced by Globe Content Studio with Harvest Portfolio Group. The Globe’s editorial department was not involved.

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