Not only are the economy and financial markets sending mixed signals, now the Fed is too.
Up until recently, the Federal Open Market Committee of the Federal Reserve Board had been unanimous in its efforts to either hold steady or slowly increase interest rates based on labor market conditions and inflation factors. However, at the April meeting, at least one member expressed dissention about the board’s lack of more aggressive action.1
Uncertainty among the FOMC also makes it difficult for investors to see a clear future. As such, many have “fled to quality.” With continued low bond yields, high-quality stocks that pay growth dividends have become an attractive alternative to fixed income products.2 They tend to have less earnings volatility and generally more dividend income contributing to their returns than low-quality stocks.
A large allocation of equities, regardless of whether they’re dividend-paying, may not be the right move for all investors. We’re happy to take a look at your portfolio and entire financial picture to see if this asset class would be appropriate for your situation.
Dividend stocks generally pay out on a quarterly basis a portion of the company’s earnings for each share to shareholders. For example, if a company pays an annualized dividend of 20 cents per share, the company will send each shareholder a check for one-fourth of 20 cents (5 cents) for each share he or she owns at the end of each quarter. However, it is important for investors to understand that dividends are paid at the discretion of the board of directors and are therefore not guaranteed.
Many investors have gotten in the habit of reinvesting those dividends throughout their working careers, which has afforded them the opportunity to buy more shares. Once retired, they can take those dividend distributions instead of reinvesting them, thereby generating a stream of income from dividend-paying stocks. Again, this assumes that the company’s board of directors continues to declare and pay dividends on a regular basis.
Unlike the interest from bonds, stock dividends also tend to grow over time. In fact, stock dividend growth has historically outpaced inflation.3 If you count the value of dividends as part of the stock market’s overall total return, the S&P 500 has already surpassed its highest return on record.4
If you’re considering making any changes to your portfolio, it’s important to work with a financial advisor to review your options within the context of personal goals and your investment timeline. Even the securities you select need to be aligned with what’s already in your portfolio. Remember, investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Depending on your particular investment goals and risk tolerance, it may be suitable to consider a mutual fund or exchange-traded fund that bundles dividend stocks in one package for diversification and risk management purposes. Please feel free to contact us to discuss your particular situation.
1Patti Domm. CNBC. April 27, 2016. “Divided Fed aims for clarity but could create confusion.”http://www.cnbc.com/2016/04/26/fed-will-do-a-cautious-dance-to-avoid-volatility.html. Accessed May 17, 2016.
2Dani Burger. Bloomberg. April 23, 2016. “Aging Baby Boomers Push Spam, Diaper Stocks to Record Valuations.”http://www.bloomberg.com/news/articles/2016-04-24/aging-baby-boomers-push-spam-diaper-stocks-to-record-valuations. Accessed May 17, 2016.
3Aaron Levitt. Investopedia. “How To Live Off Your Dividends.” http://www.investopedia.com/financial-edge/0812/how-to-live-off-your-dividends.aspx. Accessed May 17, 2016.
4Jason Zweig. The Wall Street Journal. April 21, 2016. “S&P 500 Already Hit a Record – If You Count Dividends.”http://blogs.wsj.com/moneybeat/2016/04/21/sp-500-already-at-a-record-if-you-count-dividends/. Accessed May 17, 2016.
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the complete loss of principal.
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