The Importance of Dividend Investing in Your Portfolio

Dividend investing is important because during the Great Depression once stocks finished their decline they provided an annual dividend return of about 6%. Since stocks over the long run provided a total return of 9.5% then during the Great Depression they provided two-thirds of this figure with dividends for those investors who bought after the market bottomed out. If we go into a Soft Depression then at a certain entry point when stocks become attractively priced it may be appropriate to repeat that strategy. I feel the SP low of March, 2009 of 666 points is a fair value for an entry point or possibly at 800 points. Today the SP is now trading at about 1210 points.

The Importance of Dividends

Dividend investing is an important screen for stock picking because stocks with big dividends may meet the screening test of what is a “quality company”. The test examines the corporate moat, low debts, strong balance sheet, stable and growing earnings and a reasonable dividend. (However some big dividend stocks are bad because they are a “value trap” stock that is going to keep going down while its dividend becomes larger as a percentage of the share’s price. Thus one must screen carefully when investing in stocks that pay big dividends.)

Associated Risks

One other point to be aware of the risks of dividend investing: People who are frustrated with ultra-low bond yields may be tempted to buy equities in the hopes of getting a higher yield. The rhetorical argument is “well if I can’t get a 3% bond yield I might as well buy a stock”, but that is like saying I can earn more money being a military independent contract guard in Iraq than working a security guard in the U.S., however the risk levels between those two choices are extremely different. The concept of equities should never be confused with bonds. A stock can go down a lot and stay down, while an “A” rated bond has a very high probability of being repaid on time. A bond is a sanctuary asset that one can hide in to avoid stock crashes. Bonds should be bought to preserve capital rather than to milk them for yield.

About the author

Don Martin, CFP®

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