Value, Dividends and Risk Matter in Retirement

Dividends Matter
Dividends provide a systematic source of return every quarter. Cash flow is an extremely important return component in market cycles that don’t favor the return from price appreciation. Dividend-paying stocks have historically increased dividend income at a faster rate than inflation as measured by CPI. The combination of increasing income that can be reinvested to promote compounding and price appreciation can help reliably grow investment capital.
A hypothetical $10,000 investment at the beginning of 1945 in the Dow Jones Industrial Average Index would have grown to $767,000 from price appreciation. If you had reinvested dividends to promote compounding and dollar cost averaging, the value would have increased to more than $9.3 million. According to Thomson Reuters Baseline, DJIA companies have increased dividends by 9.95% per year over the past five years through 2010. From 1945 to 2010, DJIA companies increasing dividends have outpaced the increase in CPI by more than 3:1.

Risk Matters
By focusing on the income received quarterly, investors may even be able to stay invested in declining market cycles. In volatile markets, additional risk management techniques are required to reduce volatility and loss. The objective of our risk management plan is to participate in up-market cycles while rationally moving from a fully invested position to raising cash as markets decline. Market history indicates that limiting loss of capital is far more important than attempting to get the highest return.

We suggest advisors use goals and stops to protect capital and to harvest gains. A risk management system can also provide an important secondary benefit by helping to take the emotion out of the investment decision, which can improve results. We believe a responsive system to avoid big losses can help improve return and build capital more reliably than traditional passive approaches.