As many of you know, I spent the first 26 years of my working life as corporate pilot. It was an exciting profession and I loved going to my “office” at 43,000 feet. Getting people to and from places safely was always the focus of the job.
As a financial advisor I spend my days navigating quite different terrain. But the job is the same: helping people get from here to there safely. So today I’d like to cover our Dividend Focus Strategy, and why we think it’s a smart fit for our clients young and old.
Since a picture tells a thousand words, let me draw you a picture. It will be readily apparent why I thankfully did not choose to be an artist – but it will illustrate a few important points.
Appreciation Focused Investment Strategy
Our first diagram illustrates a typical appreciation focused strategy like the one we’ve just transitioned out of. During our working years we work, save and invest. We fill our bucket. Traditionally the most common, most easily understood, investment tools have been investment products that hold stocks, bonds, real estate, commodities etc. These funds are invested in the market and the market does what the market does. Sometimes we are rewarded and sometimes we are challenged, but over long periods of time, years and even decades, our goal was appreciation in our account balance.
Dividend Focused Investment Strategy
The second diagram illustrates our dividend focused strategy. Our investment tool in this strategy is equities that currently pay and have consistently paid dividends in the past. Again, we are invested in the market and the market does what the market does. Sometimes we are rewarded and sometimes we are challenged, but our chief goal is no longer appreciation via market performance, our dividends strategy’s chief goal is the creation of income through the receipt of dividends.
It is my belief that people invest primarily for one ultimate reason: income, either income now, but certainly income for that day when the paychecks end. With that goal in mind, there is a crucial difference between these two strategies:
In our appreciation focused strategy we focus on growing our account value. This is a worthwhile pursuit but let’s emphasize you cannot spend appreciation. When the day comes that we need income, in this model, we sell assets to raise cash. We sell assets over our decades in retirement. We deplete our bucket over time with the hope and anticipation that the market will replenish our depletions and we won’t outlive our assets. Income is created by depleting or selling part of our assets.
Alternatively, in our Dividend Focused Strategy we focus on growing our income stream via companies that currently and have consistently paid dividends in the past. When the day comes that we need income, we do not deplete or sell assets. Why? Because this strategy is designed to create income through dividends we receive from the companies in which we own stock. Because companies often choose to grow their dividends, income has the potential to go up over time. Rather than depleting the account’s assets, we use dividends for income.
To summarize the two strategies in a nut shell: growth for income – cash is realized by depleting our holdings. Growth of income – cash created by receiving our dividends.
I hope it is easy for you to see why I am confident and hopeful regarding the Dividend Focused/Growth of Income strategy. I appreciate that it is a “cohesive across all ages” approach. If you are in the accumulation phase we will simply reinvest your dividends and if you are in the distribution phase we take the dividends as cash, allow it to accumulate and when needed we send it to your bank account.
Just like a good flight is assured because of a good, thorough and well informed flight plan, it is important to me that we communicate often and clearly regarding the game plan we working hard to execute. I look forward to future opportunities to share with you the benefits I see in our Dividend Focused / Growth of Income strategy. In my next article we’ll talk more specifically about the characteristics of companies we seek for inclusion in our new strategy, and more unique benefits provided by dividends.