SAN FRANCISCO (MarketWatch) — Dividend-paying stocks aren’t for widows and orphans anymore, and, for that matter, neither are Treasury bonds. As income-seeking investors know all too well, generating meaningful yield nowadays means accepting greater market risk and volatility.
Investing for income has become so challenging, it may be creating more widows and orphans than it saves. Buyers nowadays face a Hobson’s Choice that forces them to hold their noses and plunge.
Yet one income strategy is capturing the attention of investors and investment advisers alike: Swapping inflation-protected Treasurys, or TIPS, for dividend stocks yielding 3% or more.
Sounds like a slam-dunk. Except it’s not. Shifting money to stocks from bonds — even blue-chip, dividend payers — is a major decision that dramatically alters portfolio risk and volatility.
Apart from offering yield, dividend stocks are a totally different animal from bonds. Bonds return 100 cents on the dollar at maturity; stocks can lose money as long as you own them.
Dividend stocks provide income, but they’re stocks all the same. In the 2008 market meltdown, SPDR S&P Dividend, an exchange-traded fund made up of top-drawer dividend stocks, lost 23% while the benchmark Standard & Poor’s 500-stock index fell 37%.
So if you pursue this strategy, your portfolio will become more volatile, and you’ll have to be proactive about risk management.
“When someone says ‘I need more yield,’ my response is ‘You mean you need more risk in your portfolio,’” said Larry Swedroe, director of research for Buckingham Asset Management, LLC. “A dividend-paying strategy isn’t necessarily a bad one, but it’s much riskier. It’s not a substitute for fixed-income.”
Dividend-paying stocks can be relatively resilient against rising inflation. Higher prices add to cash flow, which companies then can use to pad dividend payouts. But dividend growth is a weak foil for inflation unless you’re prepared to hold the shares for many years.
Before adding dividend stocks, understand another important caveat: Higher yield doesn’t mean you’ll get a higher total return. Stocks are volatile, dividends are cut or eliminated (think big U.S. banks post-2008), and companies go out of business.
Accordingly, companies paying unusually high dividends are often out of favor or in trouble, so stick with well-known businesses with a wide “moat” — meaning they outdo competitors with products and services that appeal to a broad customer base.
Any company under consideration should have plenty of cash to cover the dividend, and a history of increasing the payout year after year.
Many U.S. companies fit that bill. Oliver Pursche, president of investment adviser Gary Goldberg & Co., likes the dividend growth of corporate America bellwethers including Procter & Gamble Co. PG -0.39% , McDonald’s Corp. MCD -0.12% , Kraft Foods Inc. KFT +0.16% , Exxon Mobil Corp. XOM -0.12% and Intel Corp. INTC +0.15%
“We’re focusing on companies and stocks that have a high dividend and a consistent history of raising dividends,” Pursche said.
An easier way for most investors would be to buy a dividend-oriented exchange-traded fund or mutual fund.
For example, high-grade dividend payers can be found by looking through the holdings of SPDR S&P Dividend SDY +0.44% , an ETF that reflects the S&P 500’s “Dividend Aristocrats” — companies that have raised dividends for at least 25 consecutive years. Or you could browse the 10 highest-yielding stocks in the Dow Jones Industrial Average DJIA +0.61% , the so-called Dogs of the Dow.
One ETF that includes many of those stocks is iShares High Dividend Equity Fund HDV +0.16% .
But if you’re an income investor turning more to stocks, you’ll handle the transition better if you can mitigate volatility, said Mitch Tuchman, co-founder of MarketRiders, which helps investors build ETF portfolios.
Try to find ETFs and funds that have portfolios with low “beta,” he added — portfolio-speak for securities that hold up better than a benchmark in bad markets (although they won’t rise as much in bullish periods).
Tuchman suggests Vanguard High Dividend Yield ETF VYM -0.04% . which has cheap expenses and yields around 3.2%. The ETF has a beta of 0.9, compared to the Dow Jones U.S. Total Stock Market Index, which carries a beta of 1.0. So the ETF can be expected to move 9% when the benchmark moves 10%.
The ETF has a “nice allocation among sectors, with companies that generate a lot of cash flow,” Tuchman said.
Tuchman also favors Vanguard Dividend Appreciation ETF, which, like SPDR S&P Dividend, is geared to companies with a record of increasing dividends. The Vanguard fund sports a 2.3% yield and has a 0.8 beta.
By comparison, iShares Dow Jones Select Dividend Index Fund DVY +0.44% has a 3.6% yield and a beta of just 0.59 — less than 60% of the S&P 500’s volatility. But its expense ratio is higher than the Vanguard offering, and the portfolio mixes in more mid-cap stocks with the big-cap battleships.
Using dividend stocks for income and forgoing the inflation protection of TIPS is controversial and not for everyone. But for some investment advisers, it’s a sign of the times.
“You don’t need inflation protection if there’s no inflation, and inflation is moderate,” said Harvey Rowen, CEO of investment adviser Starmont Asset Management LLC. “We would rather get something that yields more and go to TIPS when inflation gets worse.”
Added Rowen: “The days of ‘buy and hold’ have left. We’re now in the days of ‘buy and manage.’”
Friday, March 9, 2012
Thursday, March 8, 2012
Stocks paying a dividend are important for investors
Semi-retired and living in part off investment income, Jeff Zwerdling wouldn't consider buying a stock if it didn't pay a high dividend.
The only way to get decent investment income is to invest in stocks, said Zwerdling, a Henrico County resident and attorney.
"There are a lot of really good companies paying good returns," he said, pointing to Henrico County-based Altria Group Inc. The tobacco giant, owner of Philip Morris USA, pays a dividend yield of 5.7 percent, the amount paid per share as a percentage of the stock price.
It sure beats the 2 percent to 3 percent returns that investors get on municipal bonds and the next-to-nothing rates on certificates of deposits, he said. With interest rates near zero on government securities, dividends matter more than ever, investment experts say.
Dividends are rising and are on track to pay out a record amount this year, according to Standard & Poor's. Companies listed in the S&P 500 stock index paid $240.6 billion in dividends in 2011, up from $205 billion in 2010. The 2011 payout was the largest amount since 2008. And the companies are expected to pay $252 billion this year, according to the S&P.
The primary objective of any investing decision traditionally is income — the dividend payment, said Kent Engelke, chief economic strategist at Capitol Securities Management Inc. in Henrico. "Capital appreciation amounted to about 30 percent of total return and was secondary." That notion got turned on its head in the late 1990s when explosive-growth companies became popular and investors looked for fast avenues to wealth. "Buying stocks with a strong dividend yield is nothing new," Engelke said. "It was forgotten during an era that some thought was the new normal (1996-2007)." A return to the norm was inevitable, he said.
After a turbulent year in 2011, U.S. stocks basically ended the year flat. The S&P eked out a 2.1 percent return last year — and the gain was exclusively from dividends, according to Kanawha Capital Management's fourth-quarter report. Many companies reduced or suspended their dividends during the financial crisis to reserve cash levels and pare operations.
Now, even banks, which got slammed, are increasing or initiating payments to entice investors who may be hesitant to put their money back into stocks. Charlottesville-based SNL Financial reported that the number of banks initiating or increasing dividends grew nearly 58 percent in 2011 from the previous year. Some companies like Apple Inc. prefer to hang onto their cash — in Apple's case, $97.6 billion — and not pay dividends, claiming that cash gives them the flexibility to buy other companies.
Likewise, specialty insurer Markel Corp. in Henrico doesn't pay a dividend, believing it can achieve superior long-term returns by reinvesting earnings in the profitable growth of the company, Vice President Bruce Kay said. Others, however, have produced record cash flows, so over the past few years, they have given more and more back to shareholders, said Christopher J. Singleton, managing director of Kanawha Capital Management.
"Companies with growing dividends historically produce superior stock returns over time," Singleton said. "It's not just the yield that is important but the company's ability to raise that dividend." Take a hypothetical investment, Singleton said: Five years ago, an investor with $500,000 in two-year Treasury bonds could expect interest income of about $25,000 a year.
Today, that same investor would earn about $1,000 a year. "Ouch," Singleton said. "The Federal Reserve's low interest rate policy benefits borrowers and should ultimately stimulate the economy, but the policy has really penalized savers — particularly those relying on interest income to fund their retirement," Singleton said. "They need to either rely on less income by cutting their expenses, switch into investments that produce more income — but they need to be careful from a risk standpoint — and/or spend more of their underlying capital. The problem is if they draw down their capital, it's not there to produce future income — and that is a real dilemma for some folks.
An investor who put $500,000 in a generic group of large company stocks could expect about $10,000 a year, based on S&P's current dividend yield of 2.1 percent. That's not nearly good enough for Zwerdling — who receives an 11.8 percent dividend yield from Prospect Capital Corp., which makes loans to energy companies, and 9.4 percent from Gladstone Capital Corp., which invests in debt securities.
He also likes Redwood Trust Inc., which invests in mortgage loans and pays a yield of 8.5 percent. Verizon Communications, another good payer, consistently makes money and pays 5.3 percent dividend yield, Zwerdling said. "I love dividend paying companies, but the company has to have good fundamentals," Zwerdling said.
He looks at historical stock prices, dividends, who's in charge and how employees are treated before making an investment decision. Zwerdling said he occasionally takes a risk, buying New America High Income Fund Inc., for example, a junk bond that pays a yield of 7.8 percent. "People said, 'Are you nuts?' But I've had it for years and it's done well." Not all his picks are winners. "I've won most and lost some."
"There are a lot of really good companies paying good returns," he said, pointing to Henrico County-based Altria Group Inc. The tobacco giant, owner of Philip Morris USA, pays a dividend yield of 5.7 percent, the amount paid per share as a percentage of the stock price.
It sure beats the 2 percent to 3 percent returns that investors get on municipal bonds and the next-to-nothing rates on certificates of deposits, he said. With interest rates near zero on government securities, dividends matter more than ever, investment experts say.
Dividends are rising and are on track to pay out a record amount this year, according to Standard & Poor's. Companies listed in the S&P 500 stock index paid $240.6 billion in dividends in 2011, up from $205 billion in 2010. The 2011 payout was the largest amount since 2008. And the companies are expected to pay $252 billion this year, according to the S&P.
The primary objective of any investing decision traditionally is income — the dividend payment, said Kent Engelke, chief economic strategist at Capitol Securities Management Inc. in Henrico. "Capital appreciation amounted to about 30 percent of total return and was secondary." That notion got turned on its head in the late 1990s when explosive-growth companies became popular and investors looked for fast avenues to wealth. "Buying stocks with a strong dividend yield is nothing new," Engelke said. "It was forgotten during an era that some thought was the new normal (1996-2007)." A return to the norm was inevitable, he said.
After a turbulent year in 2011, U.S. stocks basically ended the year flat. The S&P eked out a 2.1 percent return last year — and the gain was exclusively from dividends, according to Kanawha Capital Management's fourth-quarter report. Many companies reduced or suspended their dividends during the financial crisis to reserve cash levels and pare operations.
Now, even banks, which got slammed, are increasing or initiating payments to entice investors who may be hesitant to put their money back into stocks. Charlottesville-based SNL Financial reported that the number of banks initiating or increasing dividends grew nearly 58 percent in 2011 from the previous year. Some companies like Apple Inc. prefer to hang onto their cash — in Apple's case, $97.6 billion — and not pay dividends, claiming that cash gives them the flexibility to buy other companies.
Likewise, specialty insurer Markel Corp. in Henrico doesn't pay a dividend, believing it can achieve superior long-term returns by reinvesting earnings in the profitable growth of the company, Vice President Bruce Kay said. Others, however, have produced record cash flows, so over the past few years, they have given more and more back to shareholders, said Christopher J. Singleton, managing director of Kanawha Capital Management.
"Companies with growing dividends historically produce superior stock returns over time," Singleton said. "It's not just the yield that is important but the company's ability to raise that dividend." Take a hypothetical investment, Singleton said: Five years ago, an investor with $500,000 in two-year Treasury bonds could expect interest income of about $25,000 a year.
Today, that same investor would earn about $1,000 a year. "Ouch," Singleton said. "The Federal Reserve's low interest rate policy benefits borrowers and should ultimately stimulate the economy, but the policy has really penalized savers — particularly those relying on interest income to fund their retirement," Singleton said. "They need to either rely on less income by cutting their expenses, switch into investments that produce more income — but they need to be careful from a risk standpoint — and/or spend more of their underlying capital. The problem is if they draw down their capital, it's not there to produce future income — and that is a real dilemma for some folks.
An investor who put $500,000 in a generic group of large company stocks could expect about $10,000 a year, based on S&P's current dividend yield of 2.1 percent. That's not nearly good enough for Zwerdling — who receives an 11.8 percent dividend yield from Prospect Capital Corp., which makes loans to energy companies, and 9.4 percent from Gladstone Capital Corp., which invests in debt securities.
He also likes Redwood Trust Inc., which invests in mortgage loans and pays a yield of 8.5 percent. Verizon Communications, another good payer, consistently makes money and pays 5.3 percent dividend yield, Zwerdling said. "I love dividend paying companies, but the company has to have good fundamentals," Zwerdling said.
He looks at historical stock prices, dividends, who's in charge and how employees are treated before making an investment decision. Zwerdling said he occasionally takes a risk, buying New America High Income Fund Inc., for example, a junk bond that pays a yield of 7.8 percent. "People said, 'Are you nuts?' But I've had it for years and it's done well." Not all his picks are winners. "I've won most and lost some."
Wednesday, March 7, 2012
Top 20 Stock Holdings
Here are the top 20 stocks in my Dividend Portfolio as of 2/29/12 ranked by size of holdings.
1. Kinder Morgan Energy (KMP) USA
2. DCP Midstream Partners (DPM) USA
3. Abbott Labs (ABT) USA
4. Johnson & Johnson (JNJ) USA
5. Procter & Gamble (PG) USA
6. Barclays PLC (BCS) UK
7. ONEOK, Inc. (OKE) USA
8. General Electric Company (GE) USA
9. Exxon Mobil (XOM) USA
10. PepsiCo (PEP) USA
11. Aircastle Limited (AYR) USA
12. Becton, Dickinson and Co (BDX) USA
13. GlaxoSmithKline (GSK) UK
14. Unilever NV (UN) Netherlands
15. Intel (INTC) USA
16. Brookfield Infrastructure (BIP) USA
17. Newell Rubbermaid (NWL) USA
18. CommonWealth REIT (CWH) USA
19. Pfizer (PFE) USA
20. Banco Santander (STD) Spain
Here are the top 10 holdings of the Vanguard High Dividend Yield ETF (VYM) as of 1/ 31/12. The Fund consists of stocks that are characterized by higher-than-average dividend yields, and is based on the U.S. component of the FTSE Global Equity Index Series (GEIS). Real estate investment trusts (REITs), whose income generally do not qualify for favorable tax treatment as qualified dividend income (QDI) are removed, as are stocks that have not paid a dividend during the previous 12 months.
1. Exxon Mobil Corporation (XOM) USA
2. Microsoft (MSFT) USA
3. Chevron (CVX) USA
4. General Electric Company (GE) USA
5. Johnson & Johnson (JNJ) USA
6. AT&T (T) USA
7. Procter & Gamble (PG) USA
8. Pfizer (PFE) USA
9. Walmart (WMT) USA
10. Coca-Cola (KO) USA
1. Kinder Morgan Energy (KMP) USA
2. DCP Midstream Partners (DPM) USA
3. Abbott Labs (ABT) USA
4. Johnson & Johnson (JNJ) USA
5. Procter & Gamble (PG) USA
6. Barclays PLC (BCS) UK
7. ONEOK, Inc. (OKE) USA
8. General Electric Company (GE) USA
9. Exxon Mobil (XOM) USA
10. PepsiCo (PEP) USA
11. Aircastle Limited (AYR) USA
12. Becton, Dickinson and Co (BDX) USA
13. GlaxoSmithKline (GSK) UK
14. Unilever NV (UN) Netherlands
15. Intel (INTC) USA
16. Brookfield Infrastructure (BIP) USA
17. Newell Rubbermaid (NWL) USA
18. CommonWealth REIT (CWH) USA
19. Pfizer (PFE) USA
20. Banco Santander (STD) Spain
Here are the top 10 holdings of the Vanguard High Dividend Yield ETF (VYM) as of 1/ 31/12. The Fund consists of stocks that are characterized by higher-than-average dividend yields, and is based on the U.S. component of the FTSE Global Equity Index Series (GEIS). Real estate investment trusts (REITs), whose income generally do not qualify for favorable tax treatment as qualified dividend income (QDI) are removed, as are stocks that have not paid a dividend during the previous 12 months.
1. Exxon Mobil Corporation (XOM) USA
2. Microsoft (MSFT) USA
3. Chevron (CVX) USA
4. General Electric Company (GE) USA
5. Johnson & Johnson (JNJ) USA
6. AT&T (T) USA
7. Procter & Gamble (PG) USA
8. Pfizer (PFE) USA
9. Walmart (WMT) USA
10. Coca-Cola (KO) USA
Tuesday, March 6, 2012
February Dividend Income Update
I have been building a stock portfolio of dividend stocks outside of my retirement accounts that I will use to help produce income in retirement. This portfolio was valued at $150,926 as of the end of February.
My Annualized Dividend Income as of the end of February increased to $6,489 from $6,356 over the past month. This means my dividend stocks will pay $6,489 in dividends over the next 12 months. This portfolio of stocks has a current yield of 4.29%.
My Annualized Dividend Income as of the end of February increased to $6,489 from $6,356 over the past month. This means my dividend stocks will pay $6,489 in dividends over the next 12 months. This portfolio of stocks has a current yield of 4.29%.
All my dividend distributions from the month went toward paying down debt. The stock market was up for the month and we continue to see companies increasing their dividends this year.
Most of my stocks are held in my Vanguard Brokerage account and the rest are DRIPs. I am keeping track of the amount of income I could receive once I retire or choose to receive the dividends in cash.
I will post my Top 20 Stock Holdings on Wednesday.
Monday, March 5, 2012
February Net Worth
As of the end of February our Net Worth increased to $996,928 from $977,373 for the month which is a 2.00% increase. The increase in net worth is tied to the increase for the stock market in February. The S&P 500 was up around 4.10% for the month of February.
The breakout is as follows:
ASSETS
Retirement Accounts $518,653
Taxable Accounts $150,926
Cash $31,384
Home $205,000
Other Real Estate $145,000
Cars $18,200
Personal Property $3,000
Kids 529 Accounts $45,085
DEBT
We use our other credit cards for rewards but pay off the balances each month. All dividends received this month went toward paying down debt.
The breakout is as follows:
ASSETS
Retirement Accounts $518,653
Taxable Accounts $150,926
Cash $31,384
Home $205,000
Other Real Estate $145,000
Cars $18,200
Personal Property $3,000
Kids 529 Accounts $45,085
DEBT
Other Mortgage $110,438
Car Loan $9,882
NET WORTH
$996,928
Here is the summary for this month:
The stock market was up for the month of January. The S&P 500 was up 4.10% for the month and that accounted for most of our increase in value.
Here is the summary for this month:
The stock market was up for the month of January. The S&P 500 was up 4.10% for the month and that accounted for most of our increase in value.
We use our other credit cards for rewards but pay off the balances each month. All dividends received this month went toward paying down debt.
We also have a car loan of $9,882 since we purchased a new car in October.
We will be paying down debt and trying to building up our cash over the next few months to increase our cash reserves. You can click on my Net Worth graph on the right to see the changes in each category from the previous month. We continue to fund our Roth IRA's each month.
I will post my Dividend Income Update on Tuesday.
We will be paying down debt and trying to building up our cash over the next few months to increase our cash reserves. You can click on my Net Worth graph on the right to see the changes in each category from the previous month. We continue to fund our Roth IRA's each month.
I will post my Dividend Income Update on Tuesday.
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