Boring Can Be Beautiful When It Comes to Dividend-Paying Stocks

Wednesday, May 8, 2019

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At Miller/Howard Investments, we believe an important cornerstone of any good savings plan is to invest a portion of your savings in dividend-paying stocks, even if you are a millennial!

While many asset allocation theorists advise young investors to take on more risk because they have time to recover from a poor investment, we believe younger investors might benefit from doing just the opposite with a portion of their portfolio. Since millennials have a long time before they need their nest egg, they should put time and the mathematical principle of compounding to work for them.

By using “boring” high-dividend-yielding stocks that can continue to pay their dividends, an investor can reinvest the cash flow from those stocks into more shares of high-dividend-yielding stocks, which will then generate even more cash flow…and the beat goes on!

Take, for example, saving for retirement or a child’s college education. Looking at this chart, you can see that even without any increase in the price of the underlying stocks (keeping fees and taxes out of the equation), a 4% dividend yield alone, reinvested over 18 years, can more than double a $10,000 portfolio to over $20,000.* Again, this is without any stock price changes—it is simply a portfolio of stocks that can reliably continue to pay their dividends.

chart: 18-year wealth creation compounding effect

Let’s now look at the same “boring” investment over a longer 30-year time period in the chart below. Assuming a 4% dividend yield, reinvested over 30 years, a $10,000 portfolio can grow to over $32,000.* From reinvesting those continuing dividends and assuming no change in the share price, an investor can enjoy dramatic wealth creation just from time and compounding.

chart: 30-year wealth creation compounding effect

The amazing thing is that this “compounding machine” that the investor has created, doesn’t depend on the market going up, or the economy doing better, or Washington’s fiscal policy or tax policy, or the Fed’s latest move. It doesn’t depend on anything but the ability of the portfolio of stocks to continue to generate the same dividends every year for 30 years, so the mathematical principle of compounding can do its magic.

It is true that younger investors have a longer time horizon and can recover from a riskier investment that turns sour. But rather than just using time as a bandage to try to recover from a soured investment, perhaps it’s smarter to take a portion of that portfolio and invest in “boring” high-dividend-yield stocks and use the mathematical principle of compounding and time to help build your wealth.

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* Gross of fees.


John (Jack) E. Leslie III, CFA, adds extensive experience in quantitative modeling and screening in the equity markets to his analytic strengths, and brings a high level of expertise in both fundamental and quantitative research skills, as well as experience managing large pools of institutional assets. Jack focuses on the materials, consumer staples, consumer discretionary, industrial, and healthcare sectors. Prior to joining the firm, he was a portfolio manager at Value Line Asset Management, M&T Capital Advisors Group (a division of M&T Bank Corp.), and Dewey Square Investors Corp. (now part of Old Mutual Asset Management). Jack has been interviewed by the Wall Street Journal, Barron's, Fortune, and Forbes, and been a featured guest on Thestreet.com, After the Bell on Fox Business, and Money Life with Chuck Jaffe. He earned his BS degree in Finance from Suffolk University and an MBA from Babson College.

© 2019 Miller/Howard Investments, Inc.

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.