Last month I dropped the SPDR Dow Industrials ETF (DIA) from my Monster Master List of funds. As a replacement in portfolios focused on fund investing, I recommended Vanguard High Dividend Yield ETF (VYM). The fund owns dividend-paying blue chip stocks similar to those found in the Dow Jones Industrial Average, but focuses on higher-yielding shares. The yield on VYM today is 2.81%, while the yield on the DIA ETF is 2.21%. Low-yielding companies like VISA (V) and Goldman Sachs (GS) are dragging down the income generated by owning a portfolio matching the DJIA index.
I have long advised a dividend-focused investment strategy. Capturing the power of compounding by reinvesting your dividends has been a platform of my portfolio strategy for decades. But don’t just take Dick Young’s word for it. Even the big Wall Street firms who thrive on peddling speculative shares and overpriced IPOs have—perhaps grudgingly—admitted that dividend payers outperform non-dividend payers over the long run.
Researchers from J.P. Morgan (JPM) said in April, “Stocks that pay dividends have historically outperformed non-dividend-paying stocks over the long term. Not only are total returns driven by dividend growth over the long term, but dividend-payout policies may also help drive smarter capital-allocation decisions by management.”
This year at BlackRock (BLK) a group of researchers lauded dividends, saying, “A company that continuously pays and raises its dividend is making a strong positive statement about how it views its future prospects. There is a tremendous stigma associated with cutting a dividend, so these companies are sending a clear message by maintaining their dividend strategy—they have a lot of confidence in their businesses.”
The Dogs of the Dow is a well-known dividend strategy that illustrates how focusing on high-yielding stocks can generate better performance over time. From 1928 to 2003, the Dogs of the Dow strategy worked well enough to produce an average annual out-performance of 2.54% compared to the S&P 500 Index. Am I encouraging you to rush out and implement the Dogs of the Dow strategy? No. But the strategy is illustrative of how a dividend-focused approach can boost returns.
Instead, for those of you who don’t have portfolios large enough to build your 32+ stock portfolio, I want you to focus your core equity investing on VYM. Of the top 10 holdings, five are on my Monster Master List of common stocks. And of the top 5 holdings, precisely zero are finance companies. These companies are well-known blue chips with long histories and solid branding. You’d be hard pressed to find an American who hasn’t heard of each of the companies that make up the top 20 holdings.
If you had invested $100,000 in the S&P High Yield Dividend Aristocrats (SPHYDA) and your friend had invested $100,000 in the broader S&P 500 index, on 12/31/2005, you would have an extra $14,046.64 in your bank account today.
So given all the empirical evidence and sound common sense, you might ask why everyone isn’t pursuing a dividend-focused strategy. That’s a good question, and one without a reasonable answer. But when investors focus on stocks with no dividend, they’re speculating that they will be able to sell the stock to a greater fool in the future. Rarely does it occur to these investors that they purchased the stock from someone with the exact same thought.
Don’t be the greater fool. Make sure you get paid well for your investment. Focus on dividends in your portfolio and generate a steady stream of cash that you and your family can live on during retirement. Invest in Vanguard High Dividend Yield ETF as a core holding in smaller portfolios where owning individual stocks doesn’t make sense.
In portfolios large enough to efficiently invest in individual securities, build your core equity holdings out of my Top 10 recommendations. My Top 10 every month is the list of securities I recommend for new investment. If you’re new to Intelligence Report, buy this month’s 10 holdings and then work your way backward through the monthly issues (archived on www.intelligencereport.com), adding positions until you build up a portfolio of 32+ stocks.