Income Generation with Dividend-Pay stocks, man stands in corn field collecting the ripe corn

Investment Tactics

Income Generation with Dividend Paying Stocks

Michael Ordonez

Head of Strategic Relationships and Managing Director

30 Mar 2020

2 min read

Financial advisors: Use a tried-and-true way to deliver income to your clients in times of historic market turbulence.

Proven Income Generation Strategy during Difficult Markets

Investing in dividend paying stocks may seem like a dogeared page from your grandparents’ playbook, but amid historic market turbulence, it’s important for your clients to revisit a strategy that has proven to deliver income even in challenging times.

Investment Portfolio Growth with Compounding Dividends

There are few investment stories that are as compelling to tell your clients than the power of compounding dividends. Dividends can accumulate through reinvestment, helping to grow portfolio value and becoming a real driver of total return. Historically, dividends have accounted for over 50% of the return of the S&P 500. If that sounds significant, consider that equity dividends outside the U.S. have made more of an impact, accounting for 70% of the total return of the MSCI ACWI ex-US Index since its inception. Investors who go global for dividends stand to have an advantage through dividend reinvestment and capital appreciation.

Chart 1: Stock Price and Dividends as Components of Total Return over past Decades

Look For a History of Dividend Growth

Growth of the dividend is key. Consider that since 2010, the S&P Global Dividend Aristocrats Index* (comprised of companies that have increased dividends for at least 10 consecutive years) produced average annualized returns of 6.84% while the S&P Global Dividend Opportunities Index** reached just 3.12%. As mentioned, a global dividend strategy can capture greater opportunity. Also consider a strategy that uses fundamental, bottom-up analysis to identify those companies with not only the willingness to pay a healthy dividend but the ability to sustain it and grow it.

The reinvestment of growing dividends in the S&P Global Dividend Aristocrats Index allowed investors to experience substantial capital appreciation long term even after periods of severe market volatility.

Chart 2: Capital Appreciation with Dividend Reinvestment Even after Severe Market Volatility

Dividend-Paying Stocks Can Keep Clients Invested in Volatile Times

A 2018 study, “The Dividend Disconnect,” by professors Samuel M. Hartzmark (Chicago Booth School) & David H. Solomon (Carroll School at Boston College) shows evidence that “investors separately track price changes and dividends, rather than combining them into returns.”¹ If investors track their dividends separately from their capital gains (or losses), the idea of dividends can help keep them invested during market storms (a bird in the hand, after all). That makes the higher dividends found abroad even more important.

Some global dividend strategies have a better history of delivering on consistent income than others—even amid market turbulence. Perhaps this “old standby” should become the new “go to” portfolio solution for challenging markets.

* Companies within the S&P Global Broad Market Index that have followed a policy of increasing dividends for at least 10 consecutive years.

**100 common stocks from around the world that offer high dividend yields while meeting diversification, stability, and tradability requirements.

1 Samuel M. Hartzmark & David H. Solomon. The Dividend Disconnect. 2018. SSRN. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876373

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Income Generation with Dividend Paying Stocks

Proven Income Generation Strategy during Difficult Markets