With the stock market within a whisker of its all-time high and the economy arguably near the end of the near-ten-year expansion, it only makes sense to seek out investment strategies that allow for continued participation in whatever upside stocks might lie ahead, but also provide for a measure of downside protection. Utilizing the concept of ‘dividend growth’ has proved the test of time under such circumstances.

This is a topic near and dear to my heart. In 1990, after spending nearly a decade ‘getting my feet wet’ in the business of Wall Street, I was privileged to join a small investment advisory firm that specialized in Dividend Growth. But looking back even farther to my teens and before, my father (who himself was a well-known member of the Boston institutional investment community, as well as my personal all-time Wall Street hero) often preached its benefits.

What is Dividend Growth investing?

Dividend growth investing involves…

• Building your portfolio with companies that have had a history of raising their annual dividends year-after-year-after-year, through all phases of the economic cycle.
• Diversifying across different industries and sectors so you’re not relying on a single area of the economy (Check out our blog on this- Why You Should Build a Diverse Investment Portfolio)
• Ensuring the dividend growth is being financed by higher levels of profit, rather than debt

Why are dividends, and in particular dividend growth, such an important factor?

An adage on Wall Street dating back to the 1890s is that ‘earnings are an opinion but cash is a fact’. From the shareholder point of view, that “fact of cash” is best represented by the dividend received. The declaration and subsequent payment of a dividend is a commitment to shareholders made by a company’s Board of Directors. Once initially made, this commitment is hard to break. Not to mention, the further payment of the dividend at increasingly higher levels speaks volumes about not just the strength of that ongoing commitment but also about the Board’s view of the continued strength of the company’s underlying business.

How much future return might be expected using Dividend Growth?

Since we are discussing the future, no one can know for sure. A study by Hartford Funds shows that dividend growers and initiators from 1972-2019 have returned more than 10% annually, compared to just under 8% for the S&P 500 (and did so with slightly less volatility than the overall market). In hindsight, this was the Holy Grail of investing, getting a higher return with lower risk. Perhaps in these days of lower absolute interest rates, one might reasonably expect going-forward returns to be less than in the last 47 years…but they should be very competitive indeed.

What about those high-growth companies that don’t now pay a dividend? Wouldn’t I be missing out?

Certainly the Googles and Facebooks of today and perhaps even of tomorrow won’t make the cut. Neither Amazon nor Netflix pay a dividend either…but Apple certainly does, as well as Microsoft.

However, over that 47-year period noted above, those companies that didn’t pay a dividend suffered significantly more price damage during bear markets, so much so that their long-term return was under 3%, with half-again more volatility. It’s easy to be seduced by the massive returns from such high-profile growth stocks over the past decade but we must remember that markets don’t rise forever.

Is it really that simple? What could go wrong?

Though the dividend growth metric in and of itself provides a very rich universe of potential stock investments, one can’t overlook the top-down, macro-economic and bottom-up, company-specific factors that can exert a powerful influence upon stock price performance. Diligent ongoing application of analytical frameworks on both the macro-economic and company-specific levels can help to avoid those inevitable traps that can penalize performance of any investment strategy, even one as robust as dividend growth.

How will KLR Wealth incorporate dividend growth into my portfolio?

Even though we are not in the ‘stock-picking’ business ourselves, KLR Wealth Management, LLC works with a number of institutional research and asset management partners who have proven their ability to deliver considerable value in Dividend Growth and incorporate one or more such strategies as appropriate. Reach out to us for further guidance.

My Dad is no longer with us now but I have no doubt that if he started from scratch today, the equity portion of any investment portfolio he would create would be largely if not entirely comprised of Dividend Growth stocks.