Current times have given us many paradoxes – discouragement about rising COVID-19 cases but optimism in a vaccine distribution; a desire to return to ‘normalcy’ but a deep appreciation for these slower, home-centered months. You’ll find that potential outcomes for investor portfolios contain similar contradictions – it has been the “best” of times in growth and technology yet the “worst” of times in zero rates for investors and measly fixed income returns.
Dividend payers often seek value over growth because they are in pursuit of an explicitly paid dividend as a source of income. However, the term ‘dividend’ literally means a ‘benefit from an action or policy’ – at least according to the Oxford Dictionary – so I encourage investors to expand their definitions of a dividend outside the typical earnings and profit returns. The benefit of growth in rising sectors should also be considered because an implicit dividend is often paid later once a portfolio is in distribution.
Not all holdings meet the definition of a dividend-paying stock, but that doesn’t mean there’s no place for them in investor portfolios – especially well-run companies growing with discipline like some of the FAANG stocks. Although dividend-paying stocks make up a good percentage of the S&P 500 return, those that pay the highest yields are not strictly the answer for most investors’ portfolios. When purchasing dividends, ‘signaling theory’ – which involves closely monitoring signals from management that things are going well and that dividends will be paid consistently in the future – is important. Companies with sustainable dividends and the ability to grow them are just as important as high yields.
Brand names like Microsoft (MSFT), ADP (ADP) and Texas Instruments (TXN) have been pushing technology growth, and they illustrate that dividend benefits and potential dividend appreciation can accompany growth names as well (Source: Kiplinger January 19, 2019). These types of investments are often recognized for their active returns during accumulation years, but well-run companies can add to the cash flow of a portfolio, which produces a higher annuitization dividend during distribution years.
Dividend investing is important to long-term success, but growth can be a decisive part of it. If success is defined by one’s ability to cover short-term living expenses and achieve goals for the future without running out of money, then our greater concern should be a portfolio’s ability to stream a yield that meets long-term financial needs instead of seeking a desired yield from each company dividend contained in the portfolio. Growing companies that focus on creating value for their shareholders over the long term are truly the “best” of both worlds.
Wayne Anderman CFP® MBA is the founder of Anderman Wealth Partners, based in the Greater Fort Lauderdale Area, and a registered representative of Avantax Investment ServicesSM. Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM.
Dividends are not guaranteed.
These opinions are based on Wayne Anderman’s observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 09/30/2020 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results.