Lately I’ve been hearing a lot about the “new” dividend growth strategy: Simply buy the right blue chip stocks featuring rising dividends and you’ll be on the path to a more secure retirement. With regular headlines like Top 20 High Yielding Dividend Aristocrats and 10 Dividend-Paying Blue Chips for Your Parents, it’s no wonder I’m hearing people at dinner parties buzzing about Coke (NYSE:KO), J&J (NYSE:JNJ) and P&G (NYSE:PG) in a way that reminds me of my grandparents stacking up their stock certificates to keep up with dividend checks from these venerable value giants.
But this isn’t really a new strategy. Whether it’s growth investing in the late ‘90s, value stocks after the 2000 crash, or the current focus on snapping up dividend-paying blue chips, there’s always an investment strategy that comes into favor based on market cycles and the prevailing psychology of the day. As you surely know, our current psychology is not exactly buoyant.
Before we get to psychology, let’s start by taking a specific look at the new “dividend aristocrats.” (That’s an actual index created by S&P, but I’m using the term more broadly.) The strategy emphasizes large cap value investing, but it now comes with a sexy name and a focus on companies that have consistently increased their dividend. I mean, who goes to a dinner party and says they’re buying large cap value? In the current economy, your friends might think you’re referring to a good deal on hats for your kids’ Little League team.
So what’s leading everyone to dividend growth? I suspect it’s a lack of confidence in traditional investing concepts. In this market, growth stocks are uncertain. Fixed income may not even keep up with inflation. Gold and emerging markets have become more volatile. What’s left? Old school dividend stocks. Typically issued by well-established, unsexy companies like Johnson & Johnson or Exxon Mobil (NYSE:XOM), they feel like a port in the storm.
To be fair, I can see the appeal of JNJ, with its dividend yield at 1.4% above the 10-year Treasury and better tax treatment too. You can find other similar blue chip household names and build yourself a stock portfolio that looks a lot like something your grandparents might have owned.
But before you load up on dividend stocks as the answer to your portfolio prayers, consider the psychology that’s leading you to these blue chip giants. Are you feeling nostalgic for a time when Americans owned a few of the top firms in the country and regularly collected dividends? Well, times have changed. When it comes to buying individual stocks, the days of “buy and hold” are long gone. Investors need to monitor their portfolios to know when to buy, hold, or sell. Remember, five years ago, many of the largest banks would have looked liked excellent dividend growth stocks. The mindset of yesteryear may be tempting, but there are some modern day risks.
In my next post, I’ll examine the challenges of picking individual dividend growth stocks and the trade-offs to hugging value over growth. (Hint: Remember Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL)?)
Past performance does not guarantee future results.