High Dividend Stocks - The Solution to FED Tapering?

Comment:  Although Federal Reserve "tapering" has been postponed, forward planning can produce desired investment results.

Dividend-paying stocks have recently been dragged through the mire, sliding steeply after a strong rally, due to rising speculation that the US Federal Reserve will curtail its program of "quantitative easing" and thus unleash interest rates for what's sure to be-at least in many investors' minds-a straight-up climb from here.

The crux of the concern is that dividend-paying stocks' relative attractiveness compared to risk-free assets such as US Treasury bills, notes, and bonds will disappear, as the latter's rate of return goes higher and closer to historic norms.

Traditional bond buyers who were driven into equities because risk-free vehicles were yielding less-or at best only slightly more-than the rate of inflation, may herd back into Treasuries now that market rates may no longer be compressed by the actions of an interventionist Fed.

But the recent sell-off presents an opportunity to establish positions in essential-service utility companies, master limited partnerships, and select, high-dividend-paying stocks.

You can take comfort that, historically, dividend-paying stocks have outperformed non-dividend-paying stocks. According to research compiled in a May 2013 white paper by Goldman Sachs Asset Management, since 1926 dividends accounted for more than 40% of the return of the S&P 500.

Dividend-paying stocks have outperformed non-dividend paying stocks on a total return basis. And they've done so with less volatility. Companies that have been able to raise or to begin paying dividends had even higher total returns and lower volatility than the broader dividend-paying group.

Dividend growers and initiators generated a long-term annual total return of 9.55% from January 1972 through December 2012.

All dividend-paying stocks have generated a long-term annual total return of 8.76%. The S&P 500 Total Return Index' annual total return for the comparable period is 7.05%.

Rising interest rates often follow inflation. And, crucially in this context of fevered worry, dividend growers have historically enjoyed a strong track record as interest rates rise. With less volatility than non-payers, dividend-paying stocks have outperformed over each of the last seven interest-rate tightening cycles.

Source:  David Dittman, Investing Daily

Dividend paying stocks are the primary investments in D2 Capital Management's Multi Asset Income and High Dividend Portfolios.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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