“Dividends Are Irrelevant.”
“Dividends Are Old and Boring.”
Those two headlines popped up on a recent Google search of “dividend investing.”
But something else popped up as well … a quote from the richest person in modern history:
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” — John D. Rockefeller
The anti-dividend headlines are from the mid-20-teens, when the market was obsessed with “disruptive” — but profitless — growth stocks.
Rockefeller, on the other hand, made that pro-dividend statement in 1908.
As the times change, so do investor attitudes.
For many people who’ve only been playing the market for the last 15 years or so, investing for dividends seems like something their grandma might do.
Judging by the success of many grandmas who’ve told me how well they’ve done by investing in The Bauman Letter’s Endless Income portfolio, that particular worm is turning again … and your investing strategy should turn with it.
A whole generation of investors has been conditioned to focus on stock price gains to the exclusion of everything else.
After all, the big money comes from investing in up-and-coming companies that are changing the world, right?
Sometimes, but only if you’re incredibly prescient or incredibly patient.
How many investors who bought the ARK Innovation ETF (NYSE: ARKK) called the top in February 2021?
(Click here to view clearer image.)
The fact is that most people who bought ARKK did so after it had already started its meteoric rise. Since then, they’ve lost their shirts. Some people have even argued that ARKK has produced the greatest wealth destruction in modern investing history.
That’s not to say that some of the exchange-traded fund holdings won’t go on to great things.
But even then, over time, the path to riches is still through dividends. Over 90% of the returns from the S&P 500 from 1994 to 2015 came from dividends:
(Click here to view larger image.)
That’s why I packed The Bauman Letter‘s Endless Income portfolio with income-producing dividend giants … with an average forward yield of 7.5%!
How I Quit Worrying and Learned to Love Dividends
It’s true that dividend payers tend to be mature, slower-growing companies, while younger, faster-growing companies reinvest their retained earnings (if they have any, that is) toward growth.
But as we’ve seen in the last year, the market can turn on growth stocks rapidly and viciously.
On the other hand, dividend payers offer five ways to ensure your financial future even in the toughest times.
- Dividends Don’t Lie
To pay regular dividends, companies need cash on hand that isn’t committed to anything else. Only financially healthy companies that can thrive in any conditions meet that criterion. In fact, one of dividends’ most important roles in the stock market is to communicate financial well-being and shareholder value. Dividends send a clear, powerful message about future prospects and performance. A company’s willingness and ability to pay steady dividends over time — and its power to increase them — speak volumes about its fundamentals. And when times are tough, fundamentals are what matter. Consider how dividends affect a company’s management. Growth companies — often bankrolled by venture capital — can spend like drunken sailors with no consequences. (Remember the corporate jets, multiple mansions and other excesses of WeWork’s CEO, bankrolled by billions from SoftBank?)Companies that pay dividends tend to be more efficient in their use of capital than those that don’t pay dividends. Studies show that the more cash a company keeps, the more likely it is to show excessive executive compensation, sloppy management, unproductive use of assets and to overpay for acquisitions. Many growth companies fake that growth. But you can’t fake dividends. - Dividends Are Guaranteed Return
Dividends are obviously not guaranteed. But once you receive them, it’s money in the bank. Compare that to the volatility of stock prices!
(Click here to view clearer image.)
3. Dividends Reduce Risk and Volatility
Dividends reduce overall portfolio risk and volatility. Studies show that dividend-paying stocks outperform non-dividend-paying stocks during bear market periods. While a down market drags down stocks across the board, dividend-paying stocks usually suffer significantly less decline in value than non-dividend-paying stocks. That’s why a diversified dividend portfolio inevitably outperforms the market during periods of recession. After all, dividend payouts prove that companies are financially healthy, with prudent management.
4. Dividends Help Beat Inflation
Stock price appreciation is fickle, and even worthy companies perform poorly when the market is in risk-off mode. In those circumstances, it can be difficult to earn a return that beats the loss of purchasing power from inflation. With inflation running at over 7%, stock prices need to exceed that just to retain the value of your money. But with the possibility of a recession in the near future, most analysts don’t expect the market to return even that much this year. Adding dividends to your investments — particularly highfliers like the 7.5% average forward yield on my Endless Income picks — helps to beat inflation.
5. Dividends Have Tax Advantages The IRS classifies most regular dividends distributed by U.S. companies as “qualified.” That has huge tax advantages, especially if you’re in the lower tax brackets. If your ordinary income is taxed at 10% to 12%, you don’t pay any tax at all on qualified dividends. If your income tax rate is between 12% and 35%, you pay 15% on qualified dividends. Even if you’re in the top tax bracket, which can rise to 39.5%, the tax rate on qualified dividends is capped at 20%.
The Proof Is in the Pudding
Over the last six months — some of the most difficult trading conditions in recent market history — my Endless Income portfolio has outperformed the S&P 500 by 600%. Over its lifetime, the portfolio has outperformed the market by 26%!
If you’d like to take a peek inside the portfolio — to see exact ticker symbols and detailed analysis on the market’s top-paying stocks — then I have great news.
You can get in today, totally risk-free, by clicking HERE.
Kind regards,
Ted Bauman
Editor, The Bauman Letter
