Dividend income has long been seen as the cornerstone of a retirement portfolio. For decades, the strategy was simple: buy and hold a handful of reliable ASX blue chips, sit back, and let the dividends flow in.

Today, that strategy looks less convincing. Commonwealth Bank of Australia (ASX: CBA) is yielding just over 3% while Wesfarmers Ltd (ASX: WES) is paying its lowest dividend yield in years. For long-term investors, that's a sobering reminder: many household-name companies are no longer the income machines they once were.

And this isn't just an Australian story. Over the past 150 years, dividend yields across the US market have steadily declined, even as valuations have climbed. The pattern is clear: securing stable and growing dividend income is becoming more challenging as share prices and valuation multiples continue to climb.

Why that matters for retirement planning

The consequences are real. A $500,000 portfolio yielding 3% generates just $15,000 per year in dividends. That might cover groceries, but it won't fund the lifestyle most Australians are aiming for in retirement.

What's more, inflation steadily eats away at the purchasing power of every dollar. A 3% annual rise in the cost of living halves your buying power in just over 20 years. Without significant portfolio growth in the years leading up to retirement, many investors risk outliving their savings.

This is why compounding growth matters. 

Growth expands your capital base, and it's that bigger base that provides the flexibility and income security needed later in life. For example, if that same $500,000 portfolio compounded at 8% to 10% over two decades, it could grow to $1.5 million or more. Suddenly, that same 3% yield is worth $45,000 a year, with the added security of a larger nest egg.

Growth fuels compounding

Investing for growth doesn't mean ignoring dividends altogether. Some of the best companies combine steady earnings growth with rising dividends, giving you both capital appreciation and increasing income over time. The key is recognising that dividends alone are unlikely to be sufficient without meaningful growth.

Superannuation funds know this well. Most so-called "balanced" super options have more than 70% allocated to growth assets. The logic is simple: you need growth in order to build wealth, and only once you have enough can you lean more heavily into income.

Where to find growth

So where should investors look?

• Global technology and innovation – ETFs like BetaShares Nasdaq 100 ETF (ASX: NDQ) or Global X FANG+ (ASX: FANG) provide exposure to leading companies in cloud computing, e-commerce, and AI.
  
• Australian growth leaders – The ASX is home to quality companies that have delivered better-than-average returns, from ResMed Inc (ASX: RMD) and Pro Medicus Ltd (ASX: PME) in advanced medical technology to Nick Scali Ltd (ASX: NCK) in retail. Fools know that opportunities like these can be found across the market, spanning very different industries but sharing one common trait: consistent growth.
  
• Broad diversification – Vanguard Australian Shares Index ETF (ASX: VAS) captures the local market, while Global X S&P World ex Australia GARP ETF (ASX: GARP) provides access to global companies with strong earnings growth, solid financial strength, and trading at reasonable valuations.

These types of investments may not pay out the biggest dividends today, but they grow your portfolio so that when you do tilt more toward income, you're starting from a far stronger base.

The Foolish Outlook

Retirement investing isn't about choosing income or growth — it's about timing and balance. Early on, growth should take priority to let compounding do the heavy lifting. Later, as retirement approaches, a gradual shift toward dividend shares and income-focused ETFs can provide the stability and cash flow you need.

The real risk isn't missing a dividend this year. It's reaching retirement without having grown your savings enough to live comfortably for decades. By maintaining some focus on growth, investors can build the financial security needed to not just retire, but retire with confidence.