Throughout my career, I have had the opportunity to meet many different people who all have unique circumstances. It is true that everyone’s financial situation is special and deserves to be tailor-fitted. However, there is one reoccurring conversation that I find myself having with many of my clients. I am a proponent of maintaining a cash position in each of my clients’ accounts, as well as creating an income stream throughout retirement in the appropriate situations, all while allowing portfolios to still have upside potential.
In the current environment, this has led me to building quite a few portfolios that contain dividend-paying stocks. These portfolios allow a client to produce a steady stream of income to help supplement their spending requirements. While roughly ¾ of the emphasis in the thought process in building these portfolios is on income, it is ¼ focused on capital growth.
Of course, like any strategy, there are critiques against using this approach. Some will say that it is risky to invest in equities because of their price volatility relative to more traditional fixed income offerings. However, in today’s world of low interest rates, we are witnessing a rare occurrence: the dividend yield on many stocks actually surpasses those offered by so-called “safer” investment options. In fact, the average company in the S&P 500 spent most of this year with a dividend yield that was higher than the U.S. 10 year Treasury yield, despite there being about 80 companies in the S&P 500 that pay no dividend at all.
Furthermore, over the course of five to ten years, which I believe is the appropriate time horizon for any equity investor, the odds of experiencing negative price returns is quite low. Ten-year returns in the stock market are positive over 90% of the time, and the average total return over that time period is in fact well over 100%, meaning you will usually double your money over any average ten year period of time if you are invested in stocks.
The hesitation I find with investors is usually rooted in fear. By emphasizing the appropriate time frame however, we can mostly extinguish the flames of these concerns. Instead of losing sleep at night over the volatility in markets and the 24-hour news cycle, we must keep our eye on the big picture. By investing in dividend-paying stocks, we not only produce a higher percentage of income than a portfolio filled with what I feel are expensive fixed-income assets, we also give ourselves the opportunity to considerably increase the size of your portfolio.