The Case For A Rising Dividend Strategy For Income Investors

While all investments have their pros and cons depending on the investment profile of investors, in certain economic and market environments, such as we are now experiencing, the cons can outweigh the pros for bond investors. However, in an environment of stubbornly low interest rates and stock market uncertainty, the pros may outweigh the cons with a rising dividend strategy.

We believe that investing in high-quality companies with long operating histories is the safest way to invest in stocks during economic and market downturns. That’s because companies with strong balance sheets, steady revenue streams, and healthy cash flows are typically better able to fund their operations during prolonged periods of economic weakness. For that reason, their stock prices tend to fall less than the broad market during market downturns.

The Importance Of Dividend Stocks In Managing Portfolio Risk

According to a study published in the Financial Analysts Journal, “Focusing on dividend-paying stocks significantly reduces risk, independent of investment style. This finding is true for value and growth portfolios as well as small-, mid-, and large-cap portfolios.”

While high-quality dividend stocks are not likely to generate market-leading returns in any given year, the portfolio will lose less money on the downside, which is the key to growing portfolio value over the long-term.

Investing in dividend stocks is not all about generating outsized returns; rather it is about generating a rate of return meaningfully greater than the rate of inflation while preserving capital during protracted market declines. And, because dividends are always positive, they act as an effective counterweight in down markets.

How A Rising Dividend Strategy Can Help Secure Lifetime Income Sufficiency

When considering dividend investing as part of an income strategy, there are two key concepts many advisors and investors tend to forget – that the cash income from dividends doesn’t fall just because stock prices fall. And cash dividend payouts are generally not linked to the direction of interest rates.

In fact, according to Standard & Poor’s, of the more than 1,000 companies that currently pay dividends, 53 have increased dividends every year for the last 25 years, regardless of the direction of the market or the economy.