We live in such a noisy and complex world. The “fiscal cliff”, the presidential election, Greece, France, Italy, China, a tropical storm, the shaky market, low interest rates… it’s enough to make even the most seasoned investor cautious (or crazy). All these fears transform the market into a roller coaster of daily fluctuation. For investors that means only one certainty: uncertainty.
But people still want to retire. Investors still want a steady income beyond their working years. And folks still want to work hard and watch their money grow. The problem I fear is investors spend far too much time watching the price of their portfolio and bypassing what their portfolios are doing for them. In other words the income a portfolio generates is far more important than the daily fluctuation driven by constant volatility.
It’s a simple notion, but one that’s much easier said than done. For some investors, avoiding the daily price of their portfolio is akin to taking their eye off the ball. But as soon as we start to consider strategies that make a steady income the priority, we begin to see the value in dividend-paying stocks.
History provides us with evidence of the durability of dividend stocks. Over the last 40 years, dividend-paying stocks have had an average return of 8.59% per year compared to those without a dividend at 1.37% (as demonstrated in the chart below)
Chart courtesy of American Funds Peering over the fiscal cliff, August 2012
Combine this with companies that increase their dividend yearly and the strategy is clear. As we say at Prosperion, checks are good, but bigger checks are better. We call this investment strategy The Dividend Growth Advantage™.
Now more than ever it’s important to develop a strategy and stick to it. Volatility can be a friend (whenever stocks move there’s money to be made) or a foe: the trick is recognize when. The chart below illustrates investor behavior as measured by the flow of funds into and out of stocks and bonds versus the market as measured by the Standard and Poor’s 500 index (S&P 500).
Chart courtesy of Franklin Templeton Investements, 2020 Vision Time to Take Stock, 2012.
See how two of the largest peaks and valleys on the graph correspond with some of the largest movements into and out of stock (green)? When things are good, investors buy. When disaster is in the air, investors panic.
Investors poured money into stocks at the highs in 2000 and sold near the lows in 2008. The same movements are occurring today as demonstrated by the flow of money into bonds (blue) when interest rates are at 32-year lows (and all-time high prices) setting up a potential disaster for recent bond investors.
Investing takes a steady hand and wisdom. At Prosperion, The Dividend Growth Advantage™ is one strategy we use to help our clients achieve their financial goals. If you’d like to find out more information about this strategy, please feel free to contact us any time. Thank you for your time and trust.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
The Standard & Poor’s 500 Index is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results.
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Two things should matter to retirees and near-retirees: income from investments, businesses, or social security, and how far that income goes to purchase goods and services. Taken in tandem, these elements will define the success of your retirement, offering you freedoms and flexibility in your later years or requiring you to return to work to increase your income. Steve Booren Steve […]