“You may not know it now, but you’re gonna miss this”
-Trace Adkins
The investment world is always changing. In 1917, U.S. Steel was the largest US stock followed by American Telephone & Telegraph1, and today it is Microsoft, followed by Apple. Many times, these changes in the largest companies are for the better, meaning there are technological advances and new firms rising from the garages of innovative thinkers. These are typically very visible variances. Alternatively, some things change that we don’t notice, and subsequently, investment advice doesn’t evolve to reflect those changes. I want to focus on the possible problems of having a dividend-focused portfolio. The core matter to consider being dividend yields change, quite often, and quite silently at times. Additionally, your portfolio most likely will have a value-oriented tilt, whether or not it was intentional. Some of you may have noticed how dividend yields have changed, in some instances, drastically, over the last 2-3 decades and some of you may not have. If only we had known how great those dividend yields of the past were back then. Trace Adkins may not have been talking about love but rather dividend yields when he sang, “you may not know it now, but you’re gonna miss this.”
What changes have we seen in the dividend yield? If we look at the S&P 500®, the average annual dividend yield from 1950 to 1990 was 4.04%. The average from 1991 to 2018 was 2.01%. That is almost exactly half. Why should an investor pay attention to that? Many investment articles preach about having a dividend-focused portfolio and living off of the dividends. That sounds nice, doesn’t it? Hypothetically, let’s say you needed $40,000 a year for living expenses and could get the 4.04% dividend yield from 1950-1990, your portfolio would need to be $990,100 to get $40,000 strictly from dividends. Now let’s say you could only get the 2.01% dividend yield from 1991-2018, your portfolio would need to be $1,990,100 to get $40,000 a year strictly off dividends. As you can tell, this is a drastic difference in portfolio sizes.
What happens if I have a dividend-focused portfolio? A hidden factor many people don’t take into consideration when building a dividend heavy portfolio is value vs. growth. Dividend stocks tend to be more value-oriented. Let us look at SPYD vs. SPY. SPYD is the SPDR® Portfolio S&P 500® High Dividend ETF and SPY is the SPDR® S&P 500® ETF. What that translates to is that SPYD is a dividend-focused version of SPY. If we break down SPYD to look at value vs. growth, we see that SPYD is 100% Value and 0% Growth. On the other hand, SPY (SPDR® S&P 500®) is typically close to 50% growth and 50% value. So, what is the big deal with being value heavy? Value and growth can have quite different returns because of the underlying characteristics of the companies. For example, let us look at the past few years of total returns for SPDR® S&P 500® Value ETF (SPYV) and SPDR® S&P 500® Growth ETF (SPYG).
| SPYV | SPYG | |
| 2018 | -8.93% | -0.03% |
| 2017 | 15.19% | 27.20% |
| 2016 | 17.19% | 6.74% |
| 2015 | -3.21% | 5.37% |
| 2014 | 12.10% | 14.64% |
| 2013 | 31.63% | 32.42% |
| 2012 | 17.40% | 14.34% |
| 2011 | -0.65% | 4.45% |
| 2010 | 15.36% | 16.33% |
| 2009 | 17.23% | 37.13% |
| 2008 | -36.50% | -37.48% |
These returns are total return meaning that they take into consideration change in the value of the investment along with dividend yield and capital gains. As you can see, the returns can be quite different. Having a portfolio that is strictly focused on dividends may leave you with a value-oriented portfolio that leaves you needing the market to be in favor of value.
I propose we stop thinking in terms of dividend yield on our portfolios and transition our thinking to overall return and having a balanced portfolio of growth and value. If you would have owned SPYG from 1/1/2008 to 12/31/2018, your total cumulative return would have been 158.6% while owning SPYV during that time would have been 75.9%. Those are drastic differences in return. However, there are times when value will outperform growth. There is an underlying risk with having a portfolio that completely invests one over the other, which if you choose to have a dividend-focused portfolio, you are most likely getting a value-oriented portfolio. A portfolio that is balanced between growth and value is taking a neutral, diversified position.
What am I getting at? When it comes to retirement, stop thinking of only dividends. Strive for a balanced portfolio that is focused on getting you the highest total return for your given risk level. It is less likely to be able to get a dividend yield high enough to live off the income. Even if you can get a portfolio to have a dividend yield high enough, you still are taking on an unforeseen risk with choosing value vs growth for the next coming years. As factors change in the investment world over time, so should your portfolio. Having a dividend-focused portfolio might not be as beneficial as once thought.
If you would like us to evaluate a portfolio on a value vs. growth basis, please reach out to me at jshellenberger@frontierasset.com.
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses.
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In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. The performance information presented here covers different time periods. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information. For any investment products mentioned herein, a complete description of their investment objectives, along with details of the risks and fees involved is contained in their respective prospectus and statement of additional information, which is available on their websites and should be read fully.
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| INDEX | INDEX DESCRIPTION |
| S&P 500® | Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ |
| S&P 500® Value | Represents US large value company stocks. Growth is measured on sales growth, ratio of earnings change to price, and momentum. It is a market-value-weighted index of the value stocks in the S&P 500® that are traded on the NYSE, AMEX, and NASDAQ |
| S&P 500® Growth | Represents US large growth company stocks. Growth is measured on sales growth, ratio of earnings change to price, and momentum. It is a market-value-weighted index of the growth stocks in the S&P 500® that are traded on the NYSE, AMEX, and NASDAQ |
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