The Power of Strategic Dividend Growth
Putting $100 into the S&P 500 stocks that pay dividends consistently in 1972 would be valued at $3,103 in 2012. If you were to selectively pick stocks that initiated and/or grew their dividends over time, you would return $4,168 over the same time period, or 34% more than picking those stocks that paid consistent dividends. On the contrary, a portfolio of stocks that did not pay dividends would only be worth $193, or 94% less than the portfolio of stocks that pay dividends. Scenarios like this are where we witness the power of dividend-paying stocks in the long-term.
Making money with dividend-paying stocks is not as easy as picking stocks that pay high dividends and holding them indefinitely. Stocks with abnormally high yields often fall into two categories:
- Stock Price Whacked: Stocks with unusually high dividend yields are often the result of the stock price getting hit. For instance, if a stock pays $4 in dividends each year when the stock price is $100, then the dividend yield would be 4% ($4/$100 = 4%). If the stock price went from $100 to $40, then the yield would increase to 10% ($4/$40 = 10%).
- Unsustainable Payouts: Stocks that pay high yields must be carefully analyzed to ensure that the company can continue to support the dividend payment. If a company earns $10 million this year and has committed to pay $15 million in dividends, then management may put the financial health of the company at risk to keep its promise to shareholders.
Investors are best suited to focus on the most attractive risk-adjusted dividend potential rather than just the stated yield. Additionally, investors must give dividend-paying stocks time to replenish the value lost by paying the dividend to shareholders. In order to do this, investors need an active manager for this type of investing because knowing how to determine where a stock’s future is heading requires tremendous skill and experience.
Our Investment Committee consists of seven highly experienced professionals who have been trained to look through a company’s financials to determine the health of their dividend yield. Some of the stocks/ETFs that are held in the DIAS portfolios are owned for their potential for strong income generation and capital appreciation. Furthermore, we have a new portfolio offering that offers our investors the opportunity to allocate a portion of their overall portfolio to dividend growers through the Federated Strategic Value (FSV) fund. This strategy offers an investor a highly targeted approach to owning stocks that our Investment Committee expects the dividend yield to continue to grow.
In summary, stocks that offer dividend growth over time tend to significantly outperform other dividend-paying policies. However, recognizing a good dividend-paying stock requires research and experience. The goal for investors is to own high-quality, dividend-paying stocks where the dividend yield is expected to grow over time.
Read this week’s Thought of the Week to learn more about the power of strategic dividend growth.
Click Here for the Weekly Thought As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.