October 26, 2011

Economy Calls for Dividend Yield-Based Portfolios, O'Shaughnessy's Meredith Says

Dividend-paying companies provide higher returns in tough markets, according to O'Shaughnessy Asset Management's director of research

In its weekly Wednesday Market Morning call, Envestnet Asset Management explored the subject of dividend yield-based portfolios with Chris Meredith, director of research and portfolio management at O’Shaughnessy Asset Management.

Meredith (left) pointed out that in the present economy, the need to balance client needs, risk, return and liquidity as well as income can be a challenge, but said that a portfolio designed to seek out dividend yield was a way to provide better returns than traditional safe havens with low yields, such as bonds—which he characterized as having "gone from being risk-free return to return-free risk."

Citing historical data since 1900 that show Treasury yields falling to the 7th percentile—a level clients have not seen since 1950—he said that stocks providing dividends offered higher yields even in bear markets and throughout the Great Depression than traditional holdings, and that fixed-income products are not producing enough yield for liquidity needs.

Seeking out dividend-paying stocks, said Meredith, provides a higher income stream and also means that companies in the portfolio are healthier, since if they are paying out dividends, they are "able to return capital to equity stakeholders." The strategy works in down and sideways markets, he added, and in recovery after downturns and severe bear markets.

It is both easier and more profitable, said Meredith, to follow that strategy with global investing, since it is easier to find companies that pay dividends in other countries. Only 50% of U.S. companies offer dividends, down from 80% some 30 years ago, when legislation was changed that had barred stock repurchase as a form of price manipulation.

Now U.S. companies routinely repurchase stock rather than offer dividends to stockholders, but some 75% of international companies outside the U.S. pay dividends that can provide a substantially greater return within a portfolio than relying on bonds.

The web seminar with Meredith is one in a series of free presentations on the markets and investing being held for advisors by Envestnet. Milton Ezrati of Lord Abbett provided his views on the economy on Oct. 12.

Reprints Discuss this story
This is where the comments go.