While the Federal Funds Rate continues to sit at a quarter of 1 percent, corporate bond prices have quietly tumbled over the last few months as the yield on 10-year treasuries rose nearly 1 percent. This has forced bond-adoring retirees and investors to seek alternative strategies for consistent portfolio income. There are numerous alternatives to choose but I have four reasons dividend investing has been and will continue to be a beneficial strategy for investors to implement as part of their overall allocation.
The 30-year bull run in bond prices may come to an end. Bond investors have enjoyed consistent interest payments along with capital appreciation for the last 30 years. Since 1981, 10-year treasury yields have gradually decreased from upwards of 12 percent to less than 3 percent. The steady drop in interest rates has propped up bond prices along the way. Now, with interest rates hovering close to all time lows, it is difficult to fathom any direction for interest rates to move other than sideways or up.
Dividends could be a favorable additive to an income producing portfolio full of bonds.
Was it really a lost decade in the stock market? At first glance, U.S. stock indexes have been flat for the last decade. Depending on the asset allocation strategy, one’s portfolio performance may not have been much better than the S&P 500, which is still negative on a 10 year and four year basis. Yet, S&P 500 performance is typically quoted by its basic index calculation of the aggregate prices and shares of the 500 underlying companies. It does not factor in the payment of dividends or the compounding of such through reinvestment, called “total nominal return.”
Taxes on qualified dividends will remain at 15 percent. Scheduled to expire at the end of 2010, Congress extended the qualified dividend rate for another two years. For many investors who find themselves in a high tax bracket, paying 15 percent taxes on investment returns is a breath of fresh air versus one’s marginal tax bracket.
Many companies may have bent during the recession but some did not break. The best example I can find of this is a list of elite dividend paying companies called the S&P 500 Dividend Aristocrats. According to Standards and Poor’s, the Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years. That’s a time frame that covers at least three recessions, with the most recent recession possibly the worst since the Great Depression. This can be a great starting point of research for an investor looking to allocate dividends into their overall playbook.
Many investors are recognizing the importance of diversifying their large allocation of bonds to other asset classes. At the direction of a professional, allocating part of an investment portfolio to dividend-paying companies may be a prudent move in the present market environment.
Griffin Dalrymple, is a wealth manager with Opinicus Wealth Management.