Dividend Corner: Focus on Income - Not Return

Watching the rate of return or change in the value of securities in your portfolio can be exhilarating in bull market trends and downright frightening when bear market forces take hold. If investors would change their focus from capturing return to capturing income with dividends, it could help manage their emotional response to bear markets so they can stay the course rather than bailing on their investment plans. 

In the Dot Com bull market of the late 90s, stocks were hot and so were returns. At the end of the cycle in 1998 and 1999, the S&P 500 advanced by more than 50% and the tech-heavy Nasdaq doubled in value in just two years.1 These lofty returns whipped investors into a speculative frenzy convincing the herd that this bull trend was different and could last forever. But it’s never different. The market staggered in 2000, starting a bear trend that would last until 2003.2 The bull market gains vanished like a phantom in the night leaving many investors with huge losses.

Today’s crowded trade into index products along with the narrow tech stock leadership over the past few years gives me a sense of deja vu because of the growing similarity to the late 90s market cycle. At some point, the mounting list of risk factors starting with the Fed’s quantitative tightening and the effect on the yield curve and recession will likely take their toll. Trade wars and the toxic political environment may also weigh on investors’ psyches enough to push markets into a bear trend. Once again, bull market price returns will likely vanish as bear market losses take hold. Yet, I believe income focused investors need not react and sell dividend stocks — they tend to fall less in bear markets because investors may favor the dividend income. Looking back historically, while dividend payments can fluctuate they tend to generate persistent returns throughout bear cycles.3

The return from dividend income is compelling even if you ignore capital appreciation from price returns which investors can get on top of the dividend income. If we look back 30 years to the beginning of 1988, the dividend yield of the S&P 500 Index was 3.70%, just about twice what it is today.? Companies generally establish dividend policy by determining a payout ratio for the percentage of earnings the company will pay in dividends. Company earnings can increase over time and so can dividends. Historically, the average payout ratio for the S&P 500 Index has averaged just under 40%.? I believe the power of dividend payouts increasing in lock step with earnings is underappreciated by investors. 

The power of dividend growth can be best illustrated by an example where we assume an investor whom we’ll call John was approaching retirement at the beginning of 1988 and decided to invest $1,000,000 in the S&P 500. In his first full year he would have collected quarterly dividends of almost $38,000 and 30 years later in 2017 he would have collected more than $189,000. The five-fold increase in dividend income would have been more than enough to offset the two-fold increase needed to keep pace with inflation. The total dividend income collected over the 30 year period would have exceeded $2,600,000. 

While dividend income can fluctuate when adverse financial conditions negatively impact corporate earnings, the increasing trend has been more than enough to reward investors to stick with their investment plan. Dividends really do matter and can provide a more consistent benefit than price returns which can be very difficult to hold on to from time to time.? With the bull market aging and risk factors increasing, it’s a great time for investors to switch their investment focus from chasing price returns to building dividend income. 

WBI is a market leader in providing income-focused products to help investors be more successful. WBI Power Factor High Dividend ETF (WBIY) is designed to provide high current income, inflation protection, rising dividend income, and price appreciation. Now is the time to focus on dividend income and we believe WBIY is the most advanced Smart Beta dividend ETF in the marketplace. You can find more information at www.wbietfs.com, or listen to our latest podcast episode here.

IMPORTANT INFORMATION

Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an o?er to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or pro?table all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.

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SOURCES:

1 Morningstar, 2018.

2 “11 Historic Bear Markets.” NBCNews.com, 24 June 2010.

3 Gensler, Lauren. “Why Dividend Stocks Are A Good Defense In A Choppy Market.” Forbes, 17 Oct. 2014

? “S&P 500 Dividend Yield by Year.” www.multpl.com. Accessed 4 Sept. 2018.

? Ned Davis Research, 1 Jan. 2018.

? Hicks, Coryanne. “What Are Dividends and How Do They Work?” U.S. News & World Report, 6 Mar. 2018.