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Paying Dividends
By David Mount
Investors looking to reduce market volatility, increase capital appreciation and receive a stable source of
income have begun to focus on dividend-paying stocks. As we continue to navigate through a low-interestrate environment, bond yields, already at historic lows, continue to fall out of favor with investors. The
search for income has instead led investors to dividend-paying stocks to supplement their reduced income
from fixed income investments.
In this article, we highlight some of the advantages to using dividend-paying stocks in your portfolio.
Dividend-paying stocks are not a revolutionary concept, and historically dividends have represented more
than 80% of the S&P 500 Index return since 1926.
In the current economic environment, global concerns are front and center when it comes to investment
decisions. Whether it is European sovereign debt, an overheating Chinese economy or a historically lowinterest-rate environment, there is much to be concerned about. Baby boomers heading off into retirement
are searching for a source of income with the potential to grow their portfolio. Dividend-paying stocks can
potentially play a role to help accomplish that goal.
Needing to generate income in a low-yield environment is a scary prospect for investors. Many who are
used to receiving substantial income from traditional conservative investments like CDs and bonds are
facing a new reality – that the yield generated from these instruments is no longer sufficient to cover their
spending needs. Dividend-paying stocks can potentially serve as a complement to fixed income securities
in order to help satisfy the need for yield.
Identifying stable companies with a consistent track record of growing their dividend may give the investor
an opportunity to receive a higher rate of income and potential portfolio growth. Yet careful consideration
must be used: choosing a stock based solely on dividend yield could be dangerous as past performance is
no guarantee of future results. As with any investment decision, utilizing a disciplined analytical approach is
necessary to weed out inappropriate options. Look for companies that fit your investment goals and
tolerances. Companies that show potential to grow their dividends based on strong fundamentals and profit
growth may offer the investor an opportunity to grow their income as well.
The current low-interest-rate environment has also raised the fear of inflation. As most investors know,
inflation is no friend to the fixed income portfolio: as the rate of inflation goes up, the purchasing power of
their income goes down. A portfolio with a large concentration of long-maturity fixed income investments
can have a detrimental impact on a portfolio. If income is required, one may be forced to liquidate assets in
order to satisfy distribution needs, thus exacerbating the problem. Owning stocks that have a consistent
record of increasing their dividend may help protect the portfolio and act as an inflation hedge.
Recently, we have seen a rise in market volatility. Substantial back and forth movement only to result in low
to no growth erodes investor confidence and weighs down portfolio performance. Dividend-paying stocks
historically have shown to be much less volatile than growth oriented stocks. Companies that have a strong
record of generating strong earnings and cash flow often have the financial strength to weather volatile
periods while continuing to pay their dividend.
A common financial obstacle facing many recent and imminent retirees is an underfunded retirement
portfolio. Many retirees instinctively desire to change their portfolio allocation to a more conservative
balance in preparation of withdrawing their savings to supplement their loss or declining income. In a lowinterest-rate environment, though, this can be costly, as mentioned above. The total return potential a
dividend-paying stock offers may provide an alternative to those investors who still require an element of
growth while also receiving income. As the population ages and individual financial plan income and growth
requirements potentially increase, the potential demand for dividend-paying stocks should increase along
with them.
In conclusion, the use of dividend-paying stocks in a diversified portfolio has many potential benefits. You
are able to generate income in a low-interest-rate environment, and your portfolio income grows as
dividends are raised. Dividend-paying stocks also act as an inflation hedge and volatility buffer as well as a
source of total return with the potential for capital appreciation. However, investors should bear in mind that
all stocks – including dividend-paying stocks – carry with them some amount of risk, including the possible
loss of an investor’s entire initial investment. Those who devote sufficient time to researching which
investments are appropriate for their particular income needs, though, could potentially reduce their overall
risk, allowing the income and growth needed to achieve their financial goals.
David Mount
PWM Portfolio Specialist
Wise Investor Group
Robert W. Baird & Co.
866-758-9473
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David has nearly 15 years of experience in the investment industry. He specializes in portfolio
management and asset allocation. In addition to earning a bachelor’s degree in economics from the
University of Arizona, David holds a certificate in financial planning from Georgetown University. He lives in
McLean, Virginia, with his wife, Stephanie.
As stocks represent partial ownership of a corporation, if the corporation does well, its value increases and investors share in the
appreciation. However, if it goes bankrupt or performs poorly, investors can lose their entire initial investment (i.e., the stock price can
go to zero). Conversely, bonds represent a loan made by an investor to a corporation or government. As such, the investor gets a
stated interest rate for a specific period of time and expects to get their original investment back at the end of that time period, along
with the interest earned. For this reason, dividend paying securities should not be purchased solely because of the stated yield or
dividend rate.
Robert W. Baird & Co. Member SIPC.