Many Advisors Not Using Power Of Dividends

Everyone is talking about dividend-paying stocks. They have become so popular that many investors actually perceive them as an asset class like stocks, bonds and cash. However, despite the trend toward dividend payers, many advisors haven't leveraged the power of them to help differentiate and, consequently build, their practice.

Today's ultra-low interest rate environment is forcing investors and advisors to look beyond traditional fixed-income investments to generate yield and retirement income. Investors can't just head down to the local bank, get 3% to 5% in interest, and put their retirement income on cruise control. Instead, they have to either dramatically extend fixed-income maturities or step into risk-based assets. This creates a powerful opportunity for advisors to stand out from their peers by developing organized and understandable strategies for clients.

The financial services industry has reached parity: For the most part, we all have access to the same products and services, not to mention high standards of client service. Therefore, products and customer service are no longer sufficient points of differentiation, making the need to be specialized in the area of dividend income critical to an advisor's future success.

The benefits of specializing in dividend income seems obvious: There's a constant and growing need for investors to find ways to replace their work paycheck as they transition into their golden years. While it sounds simple enough, roadblocks remain. Advisors need to become immersed in the nuances of individual stock investing and develop strategies to sell both the concepts to clients and communicate with them on an ongoing basis.

Advisors have a number of options to consider, including packaged products such as ETFs, mutual funds and separately managed accounts run by other advisors. Over the years, I've used them all. I have found that taking the time to develop my own expertise (instead of relying on others) is the most rewarding for me and my clients. Packaged products such as the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (VYM) have their place for smaller accounts, but generally the current yield for both, which ranges between 2.10% and 2.80% doesn't provide enough of a client benefit, considering the additional risk they assume by increasing their equity exposure. And that's not including the traditional 1% fee many advisors charge on top of the ETF's expense ratio. Furthermore, ETF and mutual fund dividend payouts can change month to month, creating an inconsistent income stream instead of one that's steady and ideally rising. Well-known companies like Pepsi, Johnson & Johnson and Proctor & Gamble not only have a long history of consistent payments (25 years or more) but also annual dividend increases, which can be a great hedge for clients concerned about inflation.

On a similar note, separately managed accounts tend to be very big and bulky (not personalized). Previously, while I was running a trust department we outsourced our individual stock selection and management to a team in Chicago. They maintained a giant buy list of nearly every large-cap dividend-paying company and never had a sell rating on anything. They never took gains, rarely added new names, and unfortunately didn't have a process in place to communicate the story behind the dividends, or put another way, help clients connect to the companies in which they had their life savings invested. Simply put, advisors who want to differentiate with dividends can't do it with packaged products and services because everyone has access to them.

The simplest way for an advisor to begin to transition clients to dividend-paying stocks is to recommend companies they know and trust within the context of a strategy that the client can understand. In a previous FA article, I outline a straightforward and time-tested strategy that puts an equity twist on laddered CDs. It's the foundation of my own laddered dividend portfolio and is suitable for both individual investors and advisors looking for a model to adopt. In a nutshell, investors and professionals are surprised to learn that you can build a laddering strategy with dividend-paying stocks. Like CDs, many blue-chip companies pay their dividends at different times, including quarterly and annually, as well as in different months. By strategically buying stocks with sequential dividend payments, investors can generate consistent income well above current CD rates and other packaged products. Take for example these three companies:

Assuming each company maintains their current dividend and payment date, they combine to provide a monthly paycheck throughout the year.

Using a familiar concept like this to help clients begin to transition into individual companies is a great starting point, but it's important that advisors also provide some perspective for clients so they can evaluate their new holdings on a regular basis. Simple analogies can go a long way in helping clients select and monitor their dividend stocks. I've personally got a ton of mileage out of a simple "rent" analogy. Basically, dividend stocks function like a rental home. Year over year, the value of the house may go up or down but, for the intelligent investor, as long as the rent keeps coming in, the overall value isn't as important. By its very nature, this is a simple strategy and, as you can imagine, proves extremely helpful during a downturn like the one we had last August and September when accounts lost in excess of 10%. All I had to do was recommend clients flip through their statements to realize that "the rent is still coming in."  

This is important because, in the "new normal" world, clients need to be redirected away from measuring their account performance by their account value at the end of each statement period and refocused on longer-term horizons and account income (or "rent").

The last major step for advisors looking to differentiate with dividends is to develop communication strategies that keep clients aware and comfortable with the process. The great thing about many of the top dividend-paying companies is the wealth of news and information available about them. A simple e-mail notification to clients when a dividend hits their account is a great place to start and provides them with some immediate gratification.

Adding new and interesting company stories to your newsletter is an excellent next step toward keeping clients informed. Finally, by making the names tangible, clients are more likely to connect with the companies instead of the stock market. Providing clients with simple news or product updates helps advisors achieve this more intimate level of communication. Take, for example, the new drink mix MIO developed by Kraft. When an advisor simply highlights a new product such as this one, clients begin to associate seeing those products on TV and in grocery stores with their portfolio rather than seeing just a name on paper.

The idea of helping advisors differentiate with dividends reminds me of one of my favorite stories: Two hikers, deep in a distant mountain range, came upon a foraging bear. As soon as they spied this man-eater, it began walking toward them.

Anxiously the inexperienced hiker asked his guide, "Will that bear eat us?"

The guide responded with a resounding, "Yes."

As they began to look for a safe place to escape, the hiker remarked, "I think we'd better run."

The guide looked the hiker in the eye and said, "We can't, a bear is faster and more powerful than any human. We'd be run down in a matter of seconds. It's no use to run."

The hiker quickly sat down and began changing into his running shoes.

The guide, annoyed at this point, asked, "What the heck are you doing? I just said we can't outrun a bear."

The hiker just grinned and said, "I know we can't, but all I have to do is outrun you!"

Advisors can outrun their colleagues by developing a specialization with dividends that makes clients feel comfortable and connect with the companies in which they are investing. But the strategy also will give clients the right perspective to help assess investment performance and their relationship with their advisor. Advisors who use this personalized approach will win more business and referrals, separating themselves from the crowd.

Robert Laura is the president of SYNEGOS Financial group, co-founder of RetirementProject.org, creator of the Laddered Dividend Portfolio, and author of Naked Retirement. He can be reached at [email protected].