Rethinking Fixed Income in Retirement Portfolios: The Case for Dividend Champions and TIPS

For retirees navigating the post-2020 inflationary landscape, the traditional reliance on fixed-income assets like bonds is being reevaluated. Treasury Inflation-Protected Securities (TIPS) and dividend champions—companies with 25+ years of consecutive dividend increases—have emerged as compelling alternatives. These assets offer distinct advantages in preserving purchasing power and generating income, yet their performance and risks differ significantly from conventional bonds.

TIPS: A Hedge Against Inflation, But With Caveats

TIPS are designed to adjust their principal in line with the Consumer Price Index (CPI), making them a natural hedge against inflation. During the 2022 inflation spike (9.1% CPI), TIPS outperformed traditional bonds, losing 9.5% compared to the Morningstar US Core Bond Index's 13% decline 6 Top-Performing TIPS Funds - Morningstar^[1]. However, TIPS are not immune to interest rate risk. In high-rate environments, longer-duration TIPS can experience capital losses, as seen in 2022. Shorter-duration TIPS funds like iShares 0-5 Year TIPS Bond ETF (STIP) and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP) have fared better due to their reduced sensitivity to rate changes 6 Top-Performing TIPS Funds - Morningstar^[1].

According to a report by Schwab Funds, TIPS shine when inflation exceeds breakeven expectations, but their value can lag when inflation undershoots forecasts Are TIPS Worth Considering Now? | Schwab Funds^[2]. For retirees, this means TIPS provide reliable inflation protection only if held to maturity, as secondary market prices fluctuate with interest rates.

Dividend Champions: Stability and Growth in Uncertain Times

Dividend champions, such as Altria Group (MO), Exxon Mobil (XOM), and Coca-Cola (KO), offer retirees a dual benefit: consistent income and potential for dividend growth. As of 2025, the average dividend yield for these stocks is 2.73%, with historical growth rates averaging 6.67% over the past decade The 2025 Dividend Champions: Updates, Performance^[3]. These companies have demonstrated resilience during economic downturns, maintaining payouts even as broader markets fluctuated Latest Dividend Champions List | Drip Investing^[4].

Unlike TIPS, dividend champions are equity assets and thus carry market risk. However, their long histories of dividend increases suggest strong financial fundamentals and adaptability to macroeconomic shifts. For retirees seeking income that grows over time, dividend champions provide a compelling alternative to fixed-rate bonds, which offer stagnant returns in high-inflation environments.

The Trade-Off: TIPS vs. Traditional Bonds

Traditional bonds, while offering higher yields in low-inflation periods, falter when prices rise. Fixed coupon payments lose purchasing power as inflation erodes real returns. In contrast, TIPS adjust payouts to maintain real value, making them ideal for retirees prioritizing income preservation. However, TIPS' performance is contingent on inflation trends and interest rate dynamics, which can introduce volatility in the short term 6 Top-Performing TIPS Funds - Morningstar^[1].

Dividend champions, meanwhile, offer a different risk profile. They provide growing income but lack the inflation-adjusted guarantees of TIPS. Their equity nature means returns can fluctuate with market conditions, though high-quality champions tend to be less volatile than the broader stock market Latest Dividend Champions List | Drip Investing^[4].

A Balanced Approach for Retirees

The optimal strategy may lie in combining TIPS and dividend champions. Short-duration TIPS can anchor a portfolio, providing inflation protection without excessive interest rate risk. Dividend champions, meanwhile, offer a growing income stream that can outpace inflation over time. This hybrid approach mitigates the drawbacks of either asset class alone: TIPS stabilize during inflationary shocks, while dividend champions contribute long-term growth.

Academic perspectives, such as those in Worry-Free Investing by Zvi Bodie and Michael Clowes, advocate for TIPS as a cornerstone of retirement income planning Which Is Better For Retirement Portfolios: TIPS Or Traditional Treasuries^[5]. Yet, empirical studies show no conclusive evidence that dividend stocks outperform non-dividend payers in inflation-adjusted returns Should You Chase Dividend Stocks to Combat Inflation and Rate Hikes^[6]. This underscores the importance of diversification—leveraging TIPS for stability and dividend champions for growth.

Conclusion

Retirees must rethink fixed income in an era of persistent inflation and shifting interest rates. TIPS and dividend champions each address critical needs: inflation protection and income growth. While TIPS offer a guaranteed hedge against rising prices, dividend champions provide a dynamic income stream with growth potential. A portfolio that integrates both can navigate economic uncertainties more effectively than one reliant solely on traditional bonds. As the 2020–2025 period has shown, adaptability is key to sustaining retirement income in a volatile world.