Do Dividends Matter | News or Noise

 

The public’s interest in dividend investing and, more specifically, “dividend growth” investing seems to wax and wane every couple of years, depending on the economy and sentiment. Just 6 to 9 months ago, few in the press were discussing this group of stocks with enthusiasm, while many were extolling the virtues of growth at any price stocks or valuing stocks on “TAM,” which is an acronym for “Total addressable market.”

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources, and ask, “Is it News or Noise?” for your investment portfolio. This week’s topic is “dividends matter.”

About a week ago, the big retailer Target Corp. said it would raise its quarterly dividend by 20%, to $1.08 a share from 90 cents a share. The new dividend will be payable on Sept. 10 to shareholders of record on Aug. 17. Based on the stock price of about $152.50, the new annual dividend rate implies a dividend yield of about 2.85%. This yield compares with the yield for the S&P 500 of about 1.6%. Admittingly, this dividend hike comes after Target lowered its earnings guidance for the second time in less than a month, and Target’s stock has taken a big hit.

Over time periods measured in years, dividends matter. Many dividend-paying companies tend to steadily grow their dividends over time. Well-established companies that pay dividends typically increase their dividend payouts from year to year. Many investors fail to appreciate dividends’ significant impact on stock market returns. From 1980 to 2019, almost 75% of the returns of the S&P 500 came from dividends and their reinvestment.

In addition to investment enhancement and compounding, a strategy of owning some dividend-paying and dividend growth companies has played a factor in reducing overall portfolio risk and volatility. Studies have shown that historically dividend-paying stocks outperform non-dividend-paying stocks during bear market periods. While almost no stock is immune to market corrections and bear markets, dividend-paying stocks usually suffer significantly less decline in value than non-dividend-paying stocks.

Are stories like the recent one of Target raising its dividend news for your investments? Absolutely. Dividends matter for your overall investment returns, particularly during market corrections, bear markets, or recessionary periods. However, remember that dividends are only one component of your investment returns. Having a company pay you a high stated dividend of 5-10% while the company’s stock drops -5-10% per year does you no good over time.

This is the characteristic of a classic “value trap” where a company has flat to negative revenue growth at the same time it is still trying to spend money to grow and pay a dividend to its shareholders. Try your best to avoid these types of situations that are “optically” high-yielding stocks, but when capital depreciation is factored in, your overall total return is negative year after year.

News or Noise: News

At Oak Harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future is always uncertain and that’s why our advisors and retirement planning teams, plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040, and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.

I’m Chris Perras and from everyone here at Oak Harvest Have a blessed week.