In the aftermath of the 2009 Great Recession, many savers and investors are becoming more and more frustrated by the returns they are being offered on CDs and other fixed income investments for their hard-earned savings. With 3-year CDs topping out at about 1.65% in today’s market, many retirees are finding it hard to make ends meet with the income from their CDs.
Even more problematic perhaps is that interest rates seem to drop every time we have a slowdown in the economy. You see, every time we have an economic slowdown, interest rates adjust downward in an attempt to stimulate an economic recovery. We are accustomed to blaming these low rates on the Federal Reserve, but historical records show that this has happened even when the Fed took no action.
So how can an investor plan a secure retirement with interest rates fluctuating up and down every time the economy has the hiccups? Even more importantly, how do you plan retirement when rates hover at historic lows?
STOCK DIVIDENDS MAY BE YOUR ANSWER. Investors that have invested in typical equity investments in recent years have experienced some very difficult times. Much money has been lost in investments focused on internet stocks and other “growth vehicles.” The natural response to such an experience is to avoid any stock market exposure at all.
But just because you may have had a bad date doesn’t mean you should avoid dating for the rest of your life! Hopefully, you learned from your unpleasant experience then went on to look for a companion that does not have the offensive characteristics of the unpleasant individual. Instead, you look for a companion who exhibits the characteristics your Mother told you to look for! You can apply similar wisdom with your investments.
COMPANIES THAT PAY DIVIDENDS CAN MAKE BETTER INVESTMENTS. Academic and industry studies show that high quality dividend paying companies can offer much more dependable returns. If your Mother was a veteran financial advisor, she probably would advise you to invest your hard-earned money in fundamentally sound, profitable companies which pay dividends!
A recent study done by Ned Davis Research and Oppenheimer funds found that for the over 40 years between 1972 and 2014, stocks that PAID DIVIDENDS outpaced stocks with no dividends by a factor of 10!! The dividend payers grew by the incredible rate of 2,287% while the non-dividend payers returned a much lower 203%! Even more amazing is that stocks with RISING DIVIDENDS returned an astounding 6,200%!!
Another study by the esteemed Ibbotson Associates organization found that dividends have contributed substantially to the long-term returns of the stock market. With dividends, U.S. stocks have returned an annualized 10.1% per year --- take away the dividends and the average return drops to 5.8%! Thanks to the American Association of Individual Investor for that research!
BUT WHAT ABOUT MARKET CRASHES? A recently published story in Fortune Magazine provided another interesting statistic that may be more important to most investors than the previous discussion about the impressive returns from the dividend payers. Even though
dividend payers are not totally immune to the ups and downs of the stock market, evidence shows that they are MUCH MORE RESILIENT than ordinary stocks.
Stocks that have a long track record of not only paying dividends but INCREASING THEIR DIVIDENDS every year are tracked by an index called the S&P 500 Dividend Aristocrats. The stocks making up that index recouped their recession losses much faster than the average stock --- these dividend Aristocrats recouped their entire recession losses in slightly over 13 months (April 14, 2010)--- almost 2 full years quicker that the average stock!
Hopefully, that is enough evidence to convince you that high quality, profitable dividend paying stocks could provide you with an alternative to the low interest rates being offered by our friends at the banks. Dividend income has enhanced the wealth of astute investors for many decades and it could provide you with the income you need in retirement.
There are several ways we attempt to reduce the risk in our clients’ portfolios...this is another of those powerful tools we have found to be helpful when guiding our clients’ portfolios. Gray hair is a valuable asset to an investment adviser. Let us use ours to help you meet your retirement goals.
CDs are insured by the FDIC and offer a fixed rate of return, whereas the return and principal value of investment securities fluctuate with changes in the market conditions. Dividends are not guaranteed and must be authorized by the company's board of directors. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. S&P 500 Dividend Aristocrats measure the performance S&P 500 companies that ave increased dividends every year for the last 25 consecutive years. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance. Individual investor's results will vary. Past performance does not guarantee future results.