Skip to main content

Sound Advice: June 15, 2022

All High Dividend Strategies Are Not The Same 

Comprehensive studies have highlighted the advantages provided by holding stocks with high dividend yields over extended periods, often at least a few years.  High dividend yields go hand in hand with low valuations, so this approach would seem to make a lot of sense.  But there’s a lot more to the strategy than just buying the highest yielders and then waiting for the payoff.

A closer look is essential.  One example is companies that don’t have sufficient profits to support their dividends.  Sometimes that suggests the possibility of a dividend cut or elimination, which means the high dividend yield is about to be reduced or disappear.  On a few occasions, when the earnings shortfall is not likely to persist, the dividend may be maintained.

Another concern is stocks that always have high yields and low valuations simply because the growth rates of the companies are modest or erratic.  Whether it’s slow growth, erratic progress or uncertainty about where companies are headed, investors won’t pay up.

The element that gives the high dividend yield stocks the edge is the occasional surprise that company profits have been significantly better than expected.  When that happens, their prices often jump.  The flip side, for stocks with low dividend yields and high valuations, is the likelihood that investors will bail out when there are disappointments.

However one approaches the high dividend yield strategy, it’s important to remember that the longstanding advantages it provides depend on buying a widely spread group of these stocks.  This can be done through a variety of strategies available through exchange-traded funds.  The best-known of these funds are:

SPDR S&P Dividend ETF (SDY)

iShares Select Dividend ETF (DVY)

Amplify CWP Enhanced Dividend Income ETF (DIVO)

WisdomTree U.S. Quality Dividend Growth ETF (DGRW)

Vanguard Dividend Appreciation Index Fund ETF (VIG)

SDY invests in companies that have consistently increased dividends every year for at least 20 consecutive years.  DVY is less specific, focusing on the highest-yielding stocks in the S&P Index.

DGRW differs slightly in that it includes high dividend paying U.S. common stocks with growth characteristics.

DIVO is quite different.  It invests in dividend-paying U.S. stocks along with an options strategy to reduce volatility and boost returns.

Then there’s VIG, which is a hybrid version of the high dividend yield strategy.  VIG includes a broad group of stocks in the Standard & Poor’s 500 Index that have a history of increasing dividends over time, the length of which is not specified.  This ETF turns out to have a far larger number of dividend yielding stocks so it ends up somewhere between a high dividend yield ETF and a typical S&P 500 index fund.

What’s important to remember is that although the high dividend approach has had good results over long periods, its returns are anything but assured in every single year.  Indeed, there have been multiyear spans when it came up far short.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Comments

Popular posts from this blog

Sound Advice: March 16, 2022

Pullback . . . and then what?   The one certainty about the stock market is well illustrated by an account of a 1955 story about J. Pierpont Morgan given by the U.S. Secretary of the Treasury George M. Humphrey. The story is as follows: Somebody said: ‘Mr. Morgan, you are familiar with the stock market.?’ He said: ‘Yes.’ They said: ‘You know quite a lot about it?’   And he said: ‘Yes, I do.’ They said: ‘Do you think you can tell us what the stock market will do?’   He said: ‘Yes, I can.’   They said: ‘That is very interesting.   Will you please do so?’   He said: ‘Yes. It will fluctuate.’ Equally on point is a quotation from Benjamin Graham, widely known as the father of value investing and co-author with David Dodd of the recognized text on Security Analysis: “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble . . . to give way to hop

Sound Advice: January 5, 2022

Where do we go from here?   When you consider the wide variety of factors that impact the economy and the investment markets, it would be unrealistic to be encouraged by prospects for the next few years.  Yet, although opportunities for continued progress may be more limited, there are always some worth considering. Let’s put this in perspective.  Following the 23 trading days of The Pandemic Plunge, which saw prices collapse by 34%, the Standard & Poor’s 500 Index then rebounded 113% by the most recent December 31st.  On that date, the forward price-earnings ratio of stocks in the index had risen to a lofty 21.2 compared with a 25-year average of 16.8.  (That ratio is calculated by dividing the latest level of the index (4,766) by the estimated earnings of the included companies for the next 12 months .)  By all measures, that’s a hefty valuation, one that’s even more so since it depends on estimates of what’s to come, which are anything but assured. Other measures confirm

Sound Advice: March 23, 2022

Interesting Returns   Although the pandemic and the situation in Ukraine remain important concerns, Wall Street has become increasingly focused on unusually high (albeit perhaps temporary) inflation and prospective actions by the Fed to get price increases under control.   Some days, the investment markets react dramatically to developments in this area.   On others, apparent calm prevails. However one views what lies ahead for interest rates, there are certain realities.   As rates rise, prices for bonds fall, especially for those with long maturities.   The offset, though, is the increasing attractiveness of bonds when interest yields on bonds compare more favorably to dividend yields on common stocks. To get a clearer view of the impact of rising interest rates on stocks, I compared the annual changes in interest rates on bonds to the annual returns from the S&P500 stock index for the last 50 years.   Over the five-decade span, rates rose in as many years as they fell. B