Dividends: Evolve Beyond Yield
Read enough financial news and you’ll come across articles like 7 Great Stocks with a 7% Yield touting “steady performance” for income investors. Usually click bait, however this source spent years on my parent’s coffee table.
Scrolled the list, entered some data and see 5 of 7 stocks are down more than -35% from three years ago. Steady performance?! Still, some argue for the 7% yield.
Attracted, then addicted to yield. A challenge for income investors is becoming so attracted to yield, they ignore a company’s current business model, free cash flows, payout ratios, dividend growth and other key factors. This leads to denials of “As long as I keep getting my dividend, don’t care about the share price”.
Why share price growth matters. If a company is unable to grow its share price after paying dividends over time, what in effect occurs is a redistribution of your wealth.
Take a $40 stock today paying $0.50 quarterly dividend for 5% yield, that in five years trades at $30. Yes, dividend yield increases to about 7% but follow the money. In those five years, $10 paid in dividends and $10 lost in share price nets $0 gained for 0% return. This is not earning 5% to 7% annually. Add in the taxation of dividends paid outside of retirement accounts, redistribution indeed.
Why dividend growth matters. Dividends are paid out by a company to shareholders from its profits or reserves. Consider management increasing dividends based on growing profits as usually a signal of confidence in the company’s continued earnings power and ability to sustain new payout ratios.
Beyond raising the yield on initial investment, dividend increases can grow share prices over time. Say stock yields 2.5% and the company increases dividend payout by 10%. Investors see positive attributes plus a new 2.75% yield, will likely buy more shares, driving stock price up and yield back down. All good things, as still collecting dividends, received a 10% raise in income and growth on investment.
Yes, a lot of numbers behind dividend investing. Evolve beyond one.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a Certified Financial Planner™, Chartered Retirement Planning Counselor and fee-only fiduciary helping savers, business owners and Sandwichers evolve their financial independence.
This article appeared in the February 2019 editions of Holliston Local Town Pages and Ashland Local Town Pages.
Please call me at (508) 834-7733 or directly schedule a meeting to learn more about investing, growing dividend income and retirement income planning.
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