Dividend Select Commentary – 2Q19
With all the buzz in the news over the last few years about high flying momentum stocks, it is easy to forget about the benefits of dividend stocks. One of my favorite Wall Street sayings is, “Profits are a matter of opinion but dividends are a matter of fact.” This adage drives home the point that dividends are real dollars paid out to the investor and can’t be manipulated by creative accounting. Investors use dividends as a source of income and they can also make up a substantial portion of a portfolio’s return. In the Argent Dividend Select commentary for the fourth quarter of 2018, we mentioned that according to the Hartford Funds, from 1930-2017, dividends accounted for about 42% of the S&P® 500 Index’s total return. Although it would be difficult to dispute the benefits of dividends, deciding on the best dividend investment strategy is an area where dividend investors have hotter feuds than the Hatfield’s and McCoy’s. Some investors prefer a high yield (dividend yield is a company’s dividend paid divided by its share price) while some want the focus to be on growth–how much can a dividend be expected to increase annually.
Argent prefers a mix of the two strategies. The objective of Argent’s Dividend Select strategy is to achieve a yield at least 50% greater than the yield of the S&P 500 Index. Currently, the yield on Argent’s Dividend Select strategy is 3.0% versus the 1.9% yield on the S&P 500. Although many of our companies have a history of consistent annual dividend growth, we also consider some names with particularly high yields. Our studies convince us that a strategy that combines both schools of thought allows us to provide a higher yielding strategy than most pure “dividend growth strategies” and a higher level of security than a “high yield only” strategy.
High yielding companies that provide a generous stream of income are often mature companies such as those found in the utility and telecom sectors. Purchasing a stock based on yield alone can be dangerous though, as some high yielding names may be a trap. One concern with higher yielding companies is the sustainability of the dividend, especially during difficult market conditions, which is the time investors look to the safety of dividends the most. A high dividend yield can be a sign that the company has run out of projects that will provide an attractive return and its growth prospects are slowing. Additionally, a high yield may indicate that the company is having financial issues and the high yield is due to a rapid decline in the stock price. The key to investing in higher yielding companies is to make certain the company has solid fundamentals and can sustain the dividend.
On the other hand, companies that consistently grow their dividends over time are usually stocks that have hit their stride and can return some of their excess cash to shareholders. These companies don’t provide as generous an income stream as found in the higher yielding, more mature companies. However, these companies are motivated to maintain dividend growth. If earnings aren’t increasing every year, a company may be forced to decrease its dividend, causing investors to lose confidence in the company and harm the stock price. Moreover, these stocks historically have outperformed those stocks that pay a dividend but do not grow it. From 1972-2018, dividend growers (those whose dividends were increasing over time) within the S&P returned 9.6% while dividend payers (all dividend paying companies, even those where the dividend was not increasing) returned 8.8%. Those with absolutely no change in dividend policy returned 6.9% (see charts below).
Another benefit of high dividend growers is that these companies consistently provide a stream of income that can help investors offset inflation. Dividends have increased over 14 times since 1975, a compounded growth rate of over 6.4%, ultimately double the rate of inflation over the same time period (see chart below). For us, the Argent Dividend Select Strategy has a historical five year dividend growth rate average of 9.0 %.
(source: Keating Wealth Management)
As always, we appreciate your interest in Argent Capital Management. We have four very successful equity strategies – Large Cap U.S., Small Cap U.S., Dividend Select, and Mid Cap U.S. We are very proud of all, and if you have questions on any of these, or know others who might have an interest in our strategies and mailings, please call us.
Scott Harrison, CFA
Performance results are net of fees. Past performance is no guarantee of future results. This is supplied as supplemental information to the composite disclosures presented later in this document. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities were or will be profitable. A list of stocks recommended by Argent in the previous year is available upon request. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change.