Magoon laments that sector concentration is one of the pitfalls of dividend investing strategies, whether they target growth or yield. Yield-targeting strategies often focus on consumer discretionary stocks, utilities and financial companies, while dividend growth strategies hold more consumer staples, health-care and technology companies.
“You have to be aware of the sector skew,” says Magoon. “A lot of times the sector allocation makes dividend growth products great complements to high-yield dividend products.”
While most dividend strategies should start out with a balance between growth and yield, Magoon says that allocations toward growth should increase as clients’ investment horizons lengthen.
ETFs help take the decision-making out of investors’ hands. While dividend-paying equities are likely to increase in value over the short term as bond yields remain low, income-oriented investors may be reluctant to sell high-yielding stocks with poor fundamentals or outrageous valuations.
“These indexes are emotionless and analytically driven. They’re making investment decisions that don’t revolve around fear and greed,” says Magoon. “Oftentimes, that’s the biggest problem with equity investors.”
World economic growth is picking up, said Janus Henderson, and as companies boost earnings from increased revenues and the exploitation of new efficiencies, they’re likely to share more of that money with investors through buybacks and dividends.
Janus Henderson expects 3.9 percent underlying dividend growth in 2017, projecting $1.176 trillion in global dividends. A slightly weaker dollar means that investors should benefit from dividend growth that is not as disguised by exchange rate effects.
“2017 has started on a really encouraging note for income investors, at least if you look beyond one-off special dividends,” said Alex Crooke, head of global equity income at Janus Henderson, in a statement. “Growth was broadly based across many sectors and countries, too. The outlook for the world economy looks better at present than at any time in the last few years. That means companies can grow profits and dividends at a faster pace.”