Is now the time to move into dividend paying stocks?
With costs rising and interest rates up, is now the time to emphasize dividend paying stocks?
We like dividend paying stocks as a permanent portion of a portfolio. But the question implies there is some aspect of dividend paying stocks that could make them a better choice than non-dividend stocks in times of higher inflation or rising interest rates. We don’t buy that idea and the evidence supports our skepticism.
Stocks have a great record against inflation over longer periods. But over shorter periods, stocks have a very mixed record, regardless of whether interest or inflation rates are rising or falling. The shorter the period, the more varied the outcomes.
Dimensional Fund Advisors recently produced a paper examining the performance of dividend vs. non-dividend paying stocks in periods of high inflation or rising interest rates. They concluded that non-dividend paying stocks performed better on average than dividend paying stocks in both high inflation and rising interest rate environments – but there was no consistency either way.
According to the author of the paper, Mia Huang, CFA, “…the return differences between payers vs. nonpayers and high payers vs. low payers are not reliably different from zero.” She went on to say, “… results suggest that even a crystal ball on annual inflation levels or inflation changes tells us little about how dividend-paying stocks would fare.”
…even a crystal ball on annual inflation levels or inflation changes tells us little…
Again, we believe dividend paying stocks should be part of a well-diversified stock portfolio. We also believe dividend paying stocks are not a good substitute for bond holdings. Dividend paying stocks are still stocks, not bonds, and as such are more volatile in nature. While bonds do lose money sometimes, they also provide high degrees of confidence, even certainty, about future performance because they have specific, contractually obligated maturity dates and values.
As we have said before, it is rarely a good idea to move large portions of a portfolio around based on theories about how certain assets will behave in specific economic conditions. You are either wrong, which is obviously costly, or you will be right and tempted to do it again. The more successful these speculations are, the less diversified you become.
The more reliable approach is to stay broadly diversified, patient, and disciplined.
We continue to help various media outlets provide sound information to their audiences. (Some links may require a subscription to view.)
Mike Salmon, CFP®, Charlie Fitzgerald, CFP®, Derrick Chandler, CFP®, and Tommy Lucas, CFP® participated in an October call-in event for the Orlando Sentinel. Since then, the Sentinel has highlighted several of their responses in its “Ask An Expert” feature. In a March edition, Tommy Lucas, CFP® explained that there are no taxes due when you buy a home, but they could come later.
In the News…
MFT named to “Seminole 100” for fourth time: Our firm was named to the Seminole 100, a program run by the Jim Moran Institute for Global Entrepreneurship at FSU’s College of Business, which recognizes the 100 fastest-growing privately held businesses owned or co-owned by a graduate of Florida State University (Dan Moisand, Bachelor of Science in Finance, 1989).
It is wonderful to be recognized for a good growth rate because our “marketing” is almost purely word of mouth. So, thank you! Listings like this validate our long-held belief that the best way to build the firm is to do great work for our existing clients. As personal finances get ever more complex, our ability to simplify and coordinate a clients’ financial affairs becomes increasingly important and valuable.
Talking taxes with Tommy: Throughout the heart of tax season, CNBC found a reliable source for several of its tax related stories in Tommy Lucas, CFP®, EA. Tommy provided commentary in As tuition continues to climb, these are the top tax breaks for college expenses, How to avoid a tax filing rejection if last year’s return is still pending, There’s a tricky cryptocurrency question on your tax return. ‘You’re playing with fire if you don’t report it,’ and Last chance to avoid a 50% penalty on required withdrawals is April 1 for some retirees. and Here’s what to do if you missed the April 18 tax filing deadline.
If you are a member of an organization in need of a personal finance speaker, we are happy to talk with your group’s organizers about helping out at no cost.
CNBC also reached out to Charlie Fitzgerald, CFP® for his thoughts on gold and exposure to Russian stocks. In Gold prices are popping as Russia invades Ukraine. Why you may want to resist the rush, he pointed out that over longer time frames stocks have produced far superior results than gold. On Russia, he again emphasized a longer term view in Here’s how U.S. investors may have exposure to Russian stocks, “You have this undeniable relationship between risk and reward, but you have to tolerate unsettling moments like these when reaching for higher returns,” he said. He also contributed some thoughts about how inflation erodes your long term savings.
Financial literacy gets a boost: Preparing youth for financial realities. Back in 2014, Charlie and his colleagues at the FPA of Florida started advocating strongly to add basic financial literacy to the curriculum for Florida’s 550 public high schools. This article in Investment News features Charlie as a lead source and highlights how challenging the process can be. The creation of a the mandatory elective course was finally made law in June 2019.
This year the Florida legislature has made the course mandatory for graduation starting in the school year 2023/2024. Florida became the largest state to mandate financial education in high schools joining roughly one third of the states in having a financial literacy mandate for graduation. With many high school students going straight into the work force, the course is particularly timely. The need is so acute, the measure passed by unanimous vote of both houses of the legislature, a rarity these days.
Things We Found of Note
Only 1 in 7: Proportion of investors receiving comprehensive financial planning advice or receiving a financial plan, contrary to the widespread advertising of the service, according to the Full-Service Investor Satisfaction Survey from J.D. Power. “Very few investors—even those with high net worth—are getting an optimum level of value from their advisors,” Mike Foy, senior director of wealth intelligence at J.D. Power, said in a statement.
2.4 million: Number of additional people that retired last year specifically due to the pandemic. (Federal Reserve of St. Louis)
Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on Facebook, LinkedIn, or Twitter.
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