Want to buy some boring dividend stocks? These are stocks that people would look at your funny if you bragged about them at a party. Yet these are some of the best high quality stocks you can consider today. Many of these stocks also pay you to hold them with a dividend.
Is Investing Dividend Stocks Boring?
Dividend stocks often carry a reputation for being the snoozers of the equity world. But is that necessarily a bad thing? In the age of click-bait, speculation dominates the headlines. And why wouldn’t it? Getting in early on the next world altering idea sounds like a good bet to most of us, especially if it’s as easy as it sounds. Unfortunately, it most certainly is not as easy as it sounds. That’s why it can be pay so handsomely when you’re right. Yet, the hard reality is that finding the one “story stock” that goes to the moon requires avoiding countless others that will likely see unhappy endings.
And here’s a pro tip: When it feels like everyone at the cocktail party is invested in a stock with a game-changing idea, stay away from pointy objects, because we just might be riding high on a price bubble. So, if you’re more inclined to skip the craps table like us, try looking for a strategy that builds long-term returns by avoiding failures and prioritizes those boring dividend paying stocks. The results may surprise you.
Dividend Stocks Payers Outperformed the S&P 500 but There Was a Better Option
Before diving into dividend stock performance, let’s take a quick look at two ways investors might invest for dividends.
The simplest approach? Buy stocks that pay dividends.
A more refined approach? Buy stocks that pay dividends and are growing those dividends over time.
As we can see below, either of these dividend investing approaches has shown a history of outperforming the stock market over the last 20 years. However, investing with dividend “growers” not only provided better performance, but it did so with lower volatility (risk) than dividend payers and the broader market. The point about risk is likely relevant if you’re concerned about the rocket-like climb in valuations over the last year but still want to maintain equity exposure in your portfolios.
Growth of $100,000: Dividend-Paying Stocks, Dividend-Growing Stocks and S&P 500 Index
Source: Bloomberg, as of 12/31/2021. Index performance shown is for the S&P 500 Index and does not represent TrueShares fund performance. Performance is cumulative and based on quarterly returns. The Dividend Payers or Dividend Growers category constituent inclusion or exclusion is evaluated quarterly, with performance for that group calculated for the following quarter. Dividend Payers represents performance of companies who paid a dividend in the prior quarter. Dividend Growers represents performance of companies who paid a dividend in the prior quarter and grew their dividend payments over the subsequent year. It is not possible to invest directly in an index. Performance data quoted above represents past performance and does not guarantee future results.
And it’s not just about the return benefit. Dividend “growers” also provide the ability to grow an income stream over time, an important characteristic for income-oriented investors.
We also tend to think they may be less sensitive than bonds to increases in interest rates in the near-term. This belief is driven by our view that both bond and high-growth equity security valuations benefited disproportionately compared to dividend-paying stocks as interest rates fell.
Facing an Inflationary Market
When inflation rears its head in the economy, it causes all kinds of problems as costs and prices shift for different areas of the market. When this happens, there are businesses that are ideal candidates to weather an inflationary environment. Companies with low ongoing capital costs that generate good free cash flow from their operations will have the cash on hand to make nimble and quick decisions and take advantage of potential opportunities in the market. More importantly, businesses that are well positioned to pass along any price changes to their customers tend to be ideally situated to survive and may possibly thrive during the inflationary period, coming out even stronger on the other side.
Planning Your Dividend Strategy Means Taking a Deeper Dive
Even though this is a historical look-back, an important thing to note is that the portfolio of “growers” above was constructed with a forward-looking approach; it isolated the performance of companies that grew their dividends in the subsequent year with quarterly rebalancing.
But since knowing which stocks will be part of that group in advance is impossible, how does an investor build a portfolio of dividend growers?
We believe the answer lies in:
• Identifying stocks with attractive, sustainable dividend yields for current dividend cash flow, and
• Pursuing dividend growth, which is the result of a company’s payout ratio, free cash flow stability/growth and management/board’s desire to grow dividends.
As a result, investing for dividend growth requires fundamental analysis to identify which stocks are most likely to grow and/or sustain their dividends going forward.
If the challenge of building a forward-looking dividend portfolio seems daunting, looking at managed products like ETFs may start to make sense.
Why Quality Matters
We believe in quality businesses. Quality businesses have few exciting characteristics, but they almost always have the ability to generate beneficial free cash flow from their operations and grow that cash flow over time through good management and reinvestment in their operations. Any business that can pay a sustainable dividend is likely to be free cash flow producer. Any business that can grow their dividend over time has the potential to continue growing their cash flow through smart reinvestment in their businesses. It sounds simple, but high-quality dividend paying stocks are exactly what we believe intelligent investors should be looking for. These are some of the highest quality businesses around.
Takeaway: Focus on Companies with Attractive Current Yields and Prospects for Dividend Growth
At TrueShares, we believe the “secret sauce” is finding companies that provide high current dividend yields with prospects for above average dividend growth.
As explored above, to execute this strategy, we believe you need to focus on companies with the potential to deliver:
• Attractive relative performance
• Lower volatility than the market
• Attractive income today
• Growing income over time
Finding companies that check all these boxes requires diligent, forward-looking research.
You should be afraid of gambling on money-losing stocks. It will most certainly end badly for many. But instead of completely avoiding the market, why not turn to something that has proven to work over time? As an active manager, it’s no surprise that TrueShares believes that staying the course with a forward-looking dividend investing strategy is an attractive option for many investors!
Important reminder: Stocks that pay high dividends or continue to grow dividends can fall out of favor with the market causing such securities to underperform companies that do not pay high dividends. Likewise, there can be no assurance that companies that have historically paid a dividend will continue to do so or may reduce dividends.
All investments involve risk including possible loss of principal.
The content herein includes the views, opinions and analysis of the investment manager as of the date of publication. These views and information are subject to change without notice, and are not meant to be a complete analysis of any market, industry, country, or company.
Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this document. TrueShares accepts no liability for any losses arising from use of this information and reliance upon the comments, opinions and analysis in the materials is at the sole discretion of the reader.
Before investing, investors should consider the Fund's investment objectives, risks, charges, and expenses. The prospectus, or summary prospectus, containing this and other information may be obtained by visiting www.truesharesetfs.com and should be read carefully prior to investing.
The TrueShares Low Volatility Equity Income ETF may not achieve its objective and/or you could lose money on your investment in the Fund. The Fund is recently organized with no operating history for prospective investors to base their investment decision which may increase risks. Some of the Fund’s key risks, include but are not limited to the following risks. Please see the Fund’s prospectus for further information on these and other risk considerations.
ETF Risks. As an ETF, the Fund is exposed to the additional risks, including: (1) concentration risk associated with Authorized Participants, market makers, and liquidity providers; (2) costs risks associated with the frequent buying or selling of Fund shares; (3) market prices may differ than the Fund’s net asset value; and (4) liquidity risk due to a potential lack of trading volume. Dividend Paying Security Risk. Securities that pay high dividends as a group can fall out of favor with the market, causing these companies to underperform companies that do not pay high dividends. Dividends may also be reduced or discontinued. Equity Market Risk. Common stocks are susceptible to general stock market fluctuations and to volatile increases and decreases in value as market confidence in and perceptions of their issuers change based on various and unpredictable factors including but not limited to: expectations regarding government, economic, monetary and fiscal policies; inflation and interest rates; economic expansion or contraction; and global or regional political, economic and banking crises. Market Capitalization Risk. The Fund may invest is securities across all market cap ranges. The securities of large-capitalization companies may be relatively mature compared to smaller companies and therefore subject to slower growth during times of economic expansion and may also be unable to respond quickly to new competitive challenges, such as changes in technology and consumer tastes. The securities of mid-capitalization companies may be more vulnerable to adverse issuer, market, political, or economic developments than securities of large-capitalization companies and generally trade in lower volumes and are subject to greater and more unpredictable price changes than large capitalization stocks. The securities of small-capitalization companies may be more vulnerable to adverse issuer, market, political, or economic developments than securities of large- or mid-capitalization companies and generally trade in lower volumes and are subject to greater and more unpredictable price changes than large- or mid-capitalization stocks. Depositary Receipts Risk. American Depositary Receipts (“ADRs”) have risks similar to those of foreign securities (political and economic conditions, changes in the exchange rates, etc.) and entitle the holder to all dividends and capital gains that are paid out on the underlying foreign shares.
Index Descriptions: The S&P 500® Index is a widely recognized capitalization-weighted index that measures the performance of the large-capitalization sector of the U.S. stock market. Securities in the ETF’s portfolio will not match those in any index. The ETF is benchmark agnostic and corresponding portfolios may have significant non-correlation to any index. Index returns are generally provided as an overall market indicator. You cannot invest directly in an index. Although reinvestment of dividend and interest payments is assumed, no expenses are netted against an index’s returns. Index performance information was furnished by sources deemed reliable and is believed to be accurate, however, no warranty or representation is made as to the accuracy thereof and the information is subject to correction.
Foreside Fund Services LLC, distributor.
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Today's Guest: Austin Graff
Mr. Graff serves as Managing Partner and Co-Chief Investment Officer for Titleist Asset Management. He is also the Managing Partner of Shorebird Avocet Fund, a deep value and special situations investment strategy. Prior to joining Titleist and Shorebird, Mr. Graff was a senior vice president and portfolio manager at PIMCO where he co-managed a suite of global equity strategies. He was previously a vice president in investment banking at Goldman Sachs where he advised infrastructure, industrial, and financial institution clients on strategic transactions and restructurings totaling more than $40bn. Prior to this he was a financial analyst at the Indiana Finance Authority where he worked on multiple transformational projects, helping to finance key initiatives for state and local governments.
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