Dividend-paying stocks in your portfolio
Joel Dresang: Steve, I want to talk with you about dividend-paying stocks. So, to close out 2018, we had a lot of volatility in the stock market, we had a sell-off that almost touched on a bear market. Why was that a good reminder to have dividend-paying stocks in your portfolio?
Steve Giles: Well Joel, dividend-paying stocks, as you know, provide balance to the also important growth stocks in your portfolio. Keep in mind that dividend-paying stocks do pay an attractive dividend for investors that are looking for some kind of income component in retirement, as well as providing balance to portfolios to make sure you’re not overweighted into any one particular category.
Joel: We talked in the past about how dividend-paying stocks sometimes compete with fixed-income investments like bonds. What difference does it make that the Federal Reserve is raising interest rates right now?
Steve: Well Joel, it’s a very important consideration. The Fed started raising rates in December of 2015 from near zero levels. As fixed income becomes more attractive it becomes more competitive with the dividend payers you see on the value stock side. Investors are less inclined to want to hang on to a dividend payer that might be giving them 2%-2.5% when they can go to the bank and buy a CD yielding the same amount with absolutely zero volatility.
Of course, the point here is that with the Fed nearing the end of their rate tightening, they’re going to be done raising rates, and we’ll see that headwind diminish from competitive investments outside of the stock arena.
Joel: We think of dividend payers as value stocks, which haven’t been performing as well as growth stocks for some time. What do you say to that?
Steve: Well Joel, growth stocks tend to do better during the later stages of an economic recovery, which is what we’ve seen for the last couple of years. Growth stocks outperformed value last year, but it’s also a reminder that the further we get into a period of economic recovery, the closer we are to the next recession. You and I both know that growth stocks sink like rocks in water the second that the economy gets weaker, and you want to make sure that you have value stocks, which will hold up a lot better when the market turns sour.
Joel: So dividend-paying stocks compete with growth stocks for capital appreciation and with bonds for fixed income. Where do they fit in a portfolio?
Steve: Well Joel, dividend-paying stocks are still that – stocks. They’re going to exhibit the volatility you’re going to see on any kind of stock investment and fluctuate much more than any kind of bond investment.
Of course, the income component from the dividend is very appealing to a lot of investors, especially those in retirement. Keep in mind also that that dividend that gets reinvested is going to add to your total return of a dividend-paying stock, where you’re getting the income reinvestment as well as the capital appreciation that comes with owning the stock in the first place.
Even if a value stock goes down, it’s nice knowing that you’re still going to get paid a dividend for sitting tight.
Joel: You mentioned where we are in the business cycle, how important is that in this discussion?
Steve: Well, it’s very important. We all know that the farther we get into the business cycle, the closer we are to the next recession. Growth stocks don’t do as well during periods of market weakness. And the value stocks are going to provide you with a lot less volatility than the growth stocks the second we see a market sell-off.
Joel, at the end of the day it’s all about balance. Value stocks are certainly much more conservative than growth stocks, and they’re going to hold up a lot better when the market sells off. They should be part of any well-diversified portfolio.
Reach for yield bids up dividend stocks, a Money Talk Video with Steve Giles
Why dividends matter to investors, a Money Talk Video with Adam Baley
Total Return: Your full investment picture, a Money Talk Video with Paige Radke
Retaining value in your stock portfolio, a Money Talk Video with Marc Amateis
Types of stock, from the Financial Industry Regulatory Authority
(initially posted January 30, 2019)
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