Interest rates have been trending lower since the 1980’s. As interest rates were spiraling down, many investors turned to stock dividends as a way to increase the overall income in their portfolios. With stock valuations at all-time highs and some in the investment community expecting the Federal Reserve to raise the Fed Funds rate as much as 3 times in 2017… should dividend stocks still have a place in your portfolio?
Before we answer the question that’s on every dividend stock investors mind, let’s first get a refresher on the dividend.
When a company has positive cash-flows over a certain length of time, it gives the company’s management the opportunity to reward shareholders for their loyalty in the form of a dividend. For the investor, considering the stock’s dividend is another excellent point to review in the process of stock selection for your portfolio. Companies typically pay a dividend because a company’s earnings can support it, which in turn means the company’s stock price likely has been rising over time.
So, back to that question…should dividend stocks still have a place in your portfolio?–According to Standard & Poor’s, the dividend component was responsible for 44 % of the total return of the last 80 years of the index. In addition, one of the main advantages of dividends has also been that they provide investors with consistent realized income on a quarterly basis. Speaking of consistency–there are stocks out there that have consistently increased their dividend over many years. In fact, there are exchange traded and mutual funds that mirror these stocks, some of which have annual dividend increases for the past 25 years.
While the data shows that investing in stocks with dividends has been additive overall for the investor, a little more research can help you better understand the potential for the underlying stock share values as interest rates rise. In an MSCI research paper, “Harvesting Equity Yield”, MSCI examined yield factor returns for the 88-year period ended July 2015. They found that, when rates were low to begin with, high-dividend stocks outperformed the market by an annualized 2.4 percentage points when rates started to go up.
Overall, it depends on your risk tolerance, needs for income and growth in your portfolio and the financial planning you’ve done as to whether or not you should be an investor in dividend stocks. However, if you are currently an investor in dividend stocks, rising rates alone need not be the reason to adjust or change your strategy.
Important Note: The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.
To learn more about the MSCI study, Harvesting Equity Yield: Understanding Factor Investing.