Broker Check

Dividends Matter

October 03, 2022

As late President John F Kennedy famously reminded us during his Presidency, the Chinese symbol for crisis is one part danger and the other opportunity.

Our approach to wealth management is designed to help protect you from the former and help you to capitalize on the latter.  Especially in times of peril and uncertainty.

Our Harvesting Strategy is worth revisiting in these challenging times and we are happy to discuss it further with you.  One central theme in that strategy is the importance of dividend income in helping investors pursue their goals.

When one thinks of investing in stocks whether directly through individual shares, mutual funds, index funds, etc they typically think primarily of appreciation potential.  We think first of the importance of the dividend to shareholders.  Dividends provide cash flow. That flow can be spent or reinvested.  If a company has been willing and able to grow their dividend over time, it can be a sign of quality.  Often a company’s dividend payments can increase consistently even as share prices fluctuate more widely.

Dividends are typically taxed lass than other earnings.

Constructing and Maintaining Your Dividend Portfolio

When we look for companies to invest in for dividend income we are looking at four primary items…

  1. Do they have a legacy of paying and raising dividends through a variety of economic cycles?
  2. Are they of sufficient quality to be able to maintain and build upon that legacy of growth going forward?
  3. How does the current dividend and expected earnings growth compare to other available stocks like the S & P 500 average as a whole?
  4. How well do they fit into a diversified portfolio? 

We have an extensive spreadsheet that we update regularly with help from our friends at Zacks Investor Research that helps us answer each of the above questions responsibly and thoroughly. 

We have found that when we construct a portfolio of stocks with these 4 considerations in mind they tend to perform better in market declines.  Also, we often find that the share prices tend to rise at a comparable rate to the dividend increases.

And, perhaps most importantly, we find it is easier to be comfortable holding a diversified portfolio of quality income-producing companies when markets declined and folks are tempted to sell.

We have long relied upon the 4 criteria above to make portfolio buy, hold, sell and portfolio allocation decisions.  At our new home at Harvest Wealth we now have access to resources that enhance our ability to track and analyze the data that drives each of these criterion.   And because we are independent, we can access the opinions of many thought leaders and we are not constrained by any investment banking connections or analyst coverage voids.

In other words, we are running the same strategy with fewer constraints and greater data.

So as inflation threatens the economic goals of many investors, and as the Fed’s response to it heads us towards recession, there is both peril and opportunity.  We have a plan for finding companies whose dividends appear to be more resilient during economic slowdowns to help mitigate the peril.  Likewise many companies whose dividends typically rise faster than inflation rates have fallen to levels that make them very attractive purchases right now. 

We would love to discuss it further with you. 

Call us at 301-615-9660. 

A diversified portfolio does not assure a profit or protect against loss in a declining market.