As interest rates have remained near historic lows for nearly six years, many investors have sought yields in dividend-paying stocks and funds. Accepting some risk and incorporating dividend strategies in their portfolios has helped many income-seekers and retirees find returns superior to that of Treasuries or other income options.
Yet increasing instability in some dividend-paying stocks and the Federal Reserve Board’s move to start raising rates has some questioning the security of their strategy.
The current period of low interest rates and low bond yields has changed how investors look at dividend-paying stocks and funds, says Josh Peters, equities strategist at Morningstar. With virtually no reasonable risk-free yield to be had in money markets, certificates of deposit or government bonds, some investors have been taking on a level of risk dividend-oriented funds for the chance to earn 3 percent or more. He says retiring baby boomers have also been using dividend strategies as a way to boost income.
“Some can put together a portfolio of higher yielding stocks or funds right now and get 4 percent when the 10-year Treasury bond is closer to 2 percent,” Peters says. “Dividend stocks can still provide income and remain attractive on a long-term basis.”
A 2012 report by BlackRock Investment Institute noted two major trends driving investor appetite for income from dividend stocks and funds: higher life expectancies and an explosion of retirees around the world.
Although dividend strategies may currently be producing more income than other options, increasing dividend cuts and rising interest rates has many questioning the security of their payouts and share prices. Dividend mutual funds have slightly underperformed the S&P 500 over the past 10 years. In the decade ended Nov. 30, 2015, dividend mutual funds tracked by Morningstar averaged an annual return of 6.4 percent, compared with 7.5 percent for the S&P 500.
Over the longer term, dividends can still be a positive play. Studies by BlackRock and GMO indicate that over 90 percent of U.S. equity returns over the past 100 years have been because of dividends and dividend growth. The BlackRock report concluded that high-dividend stocks and funds are a viable option because they tend to outperform most other assets in periods of low economic growth. It also found that dividend growth has historically kept up with all but the most extreme inflation environments and that dividend growth has been a key driver of total return in the long run.
Yet according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, dividend omissions doubled to 100 in 2015, and dividend decreases are up 62 percent. And an analysis by USA Today of data from S&P Capital IQ found there are 13 companies that have paid out more in dividends than they’ve earned in profit in the past year. Fifteen companies in the S&P 500 cut their dividends in 2015, compared with eight companies in 2014, 12 companies in 2013 and 11 companies in 2012.
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