Given a choice, most of your retirement income planning clients—the rational ones, at least—prefer less portfolio volatility to more. It’s a lot easier to sleep soundly when you’re earning steady, predictable returns, even if those returns are less than you might see from more volatile investments.
Earning decent returns in today’s low-rate environment is a challenge, though. Fixed-income products such as certificates of deposit and high-quality bonds just don’t pay very much. If your clients are wealthy, they might be able to keep up with inflation and get by on today’s rates without being forced to spend principal more quickly than they’d like to. For most clients, though, there’s a strong, long-term case that they need equity investments in their portfolio to preserve purchasing power and wealth.
But which stocks should they hold, assuming that they want both income and less volatility than the overall market? A recent paper, “Value of Dividends,” from Al Frank Asset Management (AFAM) in Aliso Viejo, California, makes the case for dividend-paying stocks. Here are some of the paper’s key points:
Dividend yields are at relatively high levels compared to 10-year Treasurys. As of late-May, the S&P 500 had a 1.97 percent dividend yield versus 2.5 percent for the 10-year.
Companies are raising their dividends. In 2012, 348 of the S&P 500 stocks initiated or raised their dividend; 381 did the same in 2013. Those increases mean higher income for shareholders.
Dividends matter for total return. From 1927 through 2012, dividends accounted for 42 percent of the total return for large-cap stocks, 36 percent for mid-caps and 31 percent for small-caps.