If you have followed any news stories over the past year, you might have been exposed to a lot of negative information about dividend paying stocks. I have rebutted some of them, such as the story about the end of the dividend craze. Others include the notion that rising interest rates are somehow so bad for dividend paying stocks, which it would put the end to dividend investing once and for all. The problem with those statements is that while interest rates affect the relative valuation of assets, they are just one input in valuation formulas.
I keep hearing that rising interest rates will mark the end of dividend growth investing. I am actually hoping that this talk results in lower entry prices for those investors like me who are in the accumulation age. But for other long term holders who are living off portfolios, I think that they should ignore this noise, and instead focus on enjoying the fruits of their growing income stream.
There are four reasons why I ignore this non-sense:
1) First of all, few people can predict interest rates with any accuracy. Actually, few people can actually predict anything with a reasonable success rate. I still remember how everyone was expecting hyper inflation in 2008 – 2009. I actually wrote an article about it at the time, and several readers told me how wrong I am, and how they were going to stop reading my website because of that. Before that, everyone was worried about the fall of the US dollar against other currencies, and by the fact that the World were running out of oil.
So naturally, while I do agree that interest rates could start increasing over time, I cannot tell you what the timing and amount of this increase is going to be. Therefore the impact of rising interest rates might not affect companies as much as expected. Even if interest rates did increase, and cost of capital was raised for all of corporate America, it could impact the speculative companies with untested products or constant need of new capital to maintain operations. This could potentially deflate the ongoing bubble in some technology stocks today.
2) Second, as a dividend investor, I actually do not care about short term fluctuations in the value of my investment holdings or about my total return performance relative to a group of investors with other goals and objectives. As long as my total dividend payments are stable and growing above the rate of inflation, I would be a happy camper. My goal is to live off the dividend income from my portfolio when I retire, and not be at the mercy of Mr Market’s irrational fluctuations. Dividends are more stable than capital gains, which is why they are my preferred method of funding my lavish retirement. This is because they are the only direct link between a company’s underlying business performance, and investor returns.
3) Third, as I hinted above, I focus on dividend income over time. In order for me to remain retired, I require that the total amount of distributions from my retirement portfolio grow at or above the rate of inflation over time. While rising interest rates might cause some investors to prefer fixed income yields rather than the rising yields on cost of dividend paying stocks, I would not see that as a risk.
Rather, I would view this as an opportunity to purchase quality merchandise at cheaper prices than available today. Investors should remember that fixed income securities might provide you them with a decent entry yield, and almost no risk in the case of US Government or Agency bonds. However, your purchasing power will erode over time due to inflation. With dividend paying stocks, especially those who have a culture of raising dividends, you have the chance to increase dividend income and maintain your standard of living.