Dividends Part 1 with Kevin Ellman CFP®
I love dividends.
I have been a big fan of stock dividends for many, many years. In today’s investing climate I think dividends are even more valuable. Most people don’t realize that since the 1920s, reinvested dividends make up almost half of the total return for the S&P 500. If you design a portfolio that specifically emphasizes stock dividends that percentage might even be higher. Please keep in mind that dividends are not guaranteed and it is up to the company BOD’s on whether or not to pay out cash dividends.
At the current time it can be very difficult to earn any kind of decent yield on a high-quality bond portfolio. A portfolio built around high-quality high dividend stocks could easily yield 3% to 4% or 5% each year, depending on the mix. In any year that would be pretty good, right now it is terrific by comparison. In 2012 qualifying stock dividends still receive long-term capital gains treatment. This makes the after-tax return even better.
For those people who are retired or otherwise need income from their portfolio, a significant allocation to high dividend, high-quality stocks may be a viable option as the dividends can generate income and provide some potential for that income to keep pace with inflation even if they lose out on stock value.
I like to think of a high dividend stock portfolio as being similar to a rental property. Assuming that you have a good tenant and are receiving rent on a regular basis, most property owners do not pay a lot of attention to the changing value of the property on a day to day basis. Because they’re receiving steady income they can afford to hold a long-term point of view and wait until the property increases in value before they even contemplate selling it.
This characteristic of dividend stocks encourages investors to adopt the long term view which in many cases can work in their favor. However, please keep in mind that dividends are not guaranteed. This approach can be different that is from your average stock investor who may be is checking the value of their portfolio weekly, daily or hourly.
Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk. Past Performance does not guarantee future results. This material is for informational purposes only and is not meant as Tax or Legal advice. Please consult with your tax or legal advisor regarding your personal situation. The opinions expressed are subject to change with economic and market conditions. They are not meant as investment advice. Forward looking statements and market forecasts cannot be guaranteed and may not come to pass.