You can protect your retirement from a market crash

Dividend payouts are stable, unlike share prices – and could power future returns.

David Stevenson

04 February 2026

People on the cusp of retirement finally have something to cheer about after dividends paid by global companies rose to record levels.

Those regular cheques provide a valuable source of natural income for older investors looking for an alternative to high annuity rates.

According to Capital Group, global dividends hit a third-quarter record of $519bn (£379bn) last year, with a bumper 6.2pc increase in that quarter alone.

Crucially, those dividend payouts are stable – unlike share prices, which are volatile – and nearly nine in 10 companies increased payouts or held them steady, according to Capital.

Dividends can seem a little “old school” when compared to share buybacks, which have been all the rage in recent years – especially in the US, even amongst the tech giants.

But bear in mind one crucial issue: buybacks are volatile and tend to stop rather arbitrarily.

In Europe, for instance, analysts warn that the Continent’s leading energy companies are likely to scale back their buyback programmes. By contrast, most large corporations have been reluctant to chop dividends or even slow down dividend growth.

But dividends have a much more profound significance.

Academic economists have crunched the data on dividends from major stock markets over more than a hundred years and they’ve come to a powerful conclusion. In some decades dividends, the growth in that dividend payout and their subsequent reinvestment in the underlying stocks accounted for the majority of total returns.

That’s not true for recent decades, where valuations and capital gains have powered total returns – but it could be true for the next decade if markets wobble.

Dividends also matter a great deal to many older investors seeking what’s been called a natural income in their later years.

A growing majority of older investors have most of their wealth tied up in defined contribution pensions and Isas, and their primary goal is to preserve that capital for the remainder of their lives and generate a steady income.

Annuities provide an answer and rates are currently very high but there’s a clear drawback – you don’t have any capital left when you die.

That might be fine if you want a steady income but for many other investors, that loss of capital is a major drawback.

At that point, many investors encounter the 4pc rule – a rule of thumb that says you can withdraw 4pc of your retirement portfolio in the first year, adjust that amount for inflation each year after and not run out of money for at least 30 years.

The concept was born in 1994 when William Bengen, the financial planner, published a landmark study analysing historical market data dating back to 1926.

He found that even if you retired at the absolute worst possible moment – just before the Great Depression or the stagflation of the 1970s – a 50/50 mix of stocks and bonds would have survived a 30-year retirement with a 4pc initial withdrawal rate.

For decades it was the gold standard for US-based retirees seeking income while preserving their accumulated capital.

The bad news, though, is that depending on who you talk to, that number in the UK is probably somewhere lower – and quite possibly much, much lower.

A study covering 19 developed countries found that the 4pc rule would have failed in about half of them, including major economies such as Japan, France and the UK.

Doug Brodie, a financial planner from Chancery Lane, thinks the safe max in the UK is probably closer to 3pc than 4pc.

Helpfully, that 3pc to 4pc range aligns with the typical income from dividend-oriented equity funds that invest in UK or global equities.

Crucially, Brodie prefers equity income investment trusts where the board can accumulate past income from the portfolio into reserves and then pay it out in the future, keeping the dividend progressively increasing year after year.

This has spawned a whole sub-sector of investment trusts that are called “dividend heroes”, defined as funds that have increased their dividend payouts every year for at least the last two decades without fail, even during the pandemic.

The average yield on equity income investment trusts varies between 3.5 and 4pc per annum and you still get to keep the upside from owning risky equities.

Also, there’s strong evidence to suggest that corporates tend to increase their dividends at a rate that is above inflation, thus potentially inflation-proofing your income.

Here’s one last crucial upside when thinking about how volatile equities can be.

Although dividend-focused equities tend to underperform their peers, especially tech-oriented growth stocks, during booming bull markets, their downside losses during a sell-off are usually – though not always – more subdued.

The real trick for fund managers is to combine this income focus on dividends with a keen eye for what’s called “quality” which in investment terms means looking for companies that have strong balance sheets and are steadily compounding earnings growth.

This way, you avoid stocks that boast high yields simply because they are value traps: businesses that are in trouble and deserve their low share price and high dividend yield.

Analysis by Brodie suggests that, over many decades, this focus on quality stocks in dividend-hero equity income investment trusts not only grows your yearly income payout but also increases your final capital sum – unlike annuities, where you’ll have nothing left to hand over at the end.