We frequently survey our webinar attendees on investment income. What do we repeatedly find? A dearth of investment income.
When we ask how much income our respondents’ portfolios generate monthly, “$100-or-less” is the most frequent response at 50%. I suspect the actual income generated is closer to “less” than to $100.
Many of our webinar attendees are middle-aged and above. Many are close to retirement, if they’re not already retired. Many of our newsletter readers are slotted into the same demography. (Perhaps this includes you.)
If you’re no longer earning an income through employment, how will you generate the cash to pay the bills?
A company-sponsored pension? Maybe, but they’re going the way of the neighborhood Blockbuster store.
You’ll claim Social Security in your dotage. You won’t claim much.
The average monthly Social Security check is only $1,100. Unless you’re content to go nowhere and to do nothing, $1,100 could suffice.
To maintain a semblance of normality in the retirement years, most of us will need our investment portfolio to carry the load. The investment portfolio will need to generate sufficient income.
I’m comfortable to say that “$100-or-less” a month is insufficient.
The Federal Reserve, as well as the other major central banks, has wrung out most of the income from traditional income investments. Quality bonds, certificates of deposit, savings accounts pay a fraction of what they paid before the 2008-2009 recession.
Therefore, when we talk portfolio income, we’re talking dividends, mostly.
That’s not a bad thing, even if the Federal Reserve were to back away from financial repression. Dividend stocks can carry the bill-paying load. Dividend stocks and dividend income can ensure a comfortable retirement.
Consider the wealth and income-generating properties of a quality dividend growth stock. I offer Microsoft (NASDAQ: MSFT) as an example.
Microsoft began paying a dividend in February 2003. A quarterly dividend was initiated at $0.08 per share. Sixteen years ago, you could have bought a share of Microsoft for around $30. The annual dividend — $0.32 per share — generated a 1% yield on that investment.
Fast-forward to today and we find Microsoft’s quarterly dividend has grown to $0.46 per share. The annual dividend — $1.84 per share — generates a 6.1% yield on the 2003 investment.
As the dividend goes, so eventually goes the share price. A $30 Microsoft share 16 years ago is a $110 Microsoft share today.
Most quality dividend growers, like Microsoft, require you to start at a lower yield. A quality high-yield dividend stock can offer significantly more immediate income. I offer Ares Capital Corp. (NASDAQ: ARCC) as an example.
Ares Capital, a business development company (BDC), began to trade publicly in December 2004. Ares Capital paid its first quarterly dividend — $0.30 per share — the same time. You could have bought an Ares Capital share for $17.50 in 2004. The annual dividend — $1.20 per share – would have generated a 6.9% yield on investment.
Fast-forward to today and we find that Ares Capital’s quarterly dividend has grown to $0.40 per share, or $1.60 per share annually. Ares Capital shares maintain the same terrain they maintained in 2004. The shares trade at around $17.50 today.
But that’s OK. Ares Capital’s investment thesis centers on current high-yield income, not share-price appreciation.
Ares Capital shares remain locked at around $17.50, but the investor who has collected all of Ares Capital’s dividends has collected $21.70 per share. The dividends have paid for the investment with $4.20 to spare.
Dividends have always been an integral component of investment returns. They contributed 42% of the total return of the S&P 500 from 1930 to 2017.
In one decade, the 2000s, dividends even provided the only return. Had you invested only in S&P 500 stocks that paid no dividends, you would have ended the decade with a loss.
But what if you’re an investor of a younger vintage? Should you still focus on dividends and dividend income?
The answer is yes.
A $10,000 investment in the S&P 500 in 1960 would have grown to $460,000 on share-price appreciation alone. Factor in dividends, which you could have reinvested in the S&P 500, and the same $10,000 investment would have grown to $2.57 million.
A portfolio composed of S&P 500 stocks that didn’t pay dividends generated a 2.6% average annual return from 1972 through 2017. A portfolio composed of S&P 500 stocks that paid dividends generated a 9.3% average annual return.
The dividend-paying portfolio generated an average return three-and-a-half times more than the non-dividend-paying portfolio.
If your investment portfolio is a wreck, if it pays insufficient income, look to dividend stocks for a fix.