After listening to the umpteenth segment on CNBC where both guests extolled the virtues of some version of dividend stocks, dividend growers or high yielders or the like, it has become clear that we have a very popular theme here. Over the last couple of years I've had some posts where I have tried to isolate the importance of dividends to a portfolio but tried to warn of the risk of a cultish devotion to them, hence the term dividend zealot.
Also during the week I read a post at Seeking Alpha with a cautious tone on a dividend stock bubble and all the usual suspects chimed in about why dividend stocks can't be a bubble.
For people not cultishly devoted (read all the comments on dividend articles at SA and tell me there isn't a cultish tone) but still very interested in the topic, I thought of a different way to articulate my thoughts on this subject which hopefully is useful. In listening to the aforementioned CNBC segments and the articles that have popped up, people seem to think of dividend stocks as an asset class which I don't think is the right way to look at it. People also think of dividends in terms of various strategies like dividend growth and so on; the strategy idea is a correct way to look at it but I don't think it is the only way.
I think of dividends, more precisely yield, as an attribute to be managed in the portfolio. In the trade we executed during the week we added a name that has a pretty easy time paying 6%. I also mentioned that I expect to add a couple of other stocks with similar attributes (higher yield and low volatility) with an idea toward increasing the yield of the portfolio.
Part of my thesis for the decade is equity returns for the US market that are below "normal." The last two years averaged out don't refute the idea. Dividends over extremely long periods of time account for about half of equities' total return and if I am right about the new decade, then dividends might account for more than half. While I believe this to be a very plausible scenario it also appears that from the bottom up, yields on many stocks are now quite a bit higher than they were in the 1990s or 2000s. It is much easier to find stocks yielding 3% than it was ten years ago.
In years past I wrote many times about targeting a 3% equity yield against the SPX's 2% yield, but now it might be possible to get a 4% yield against the SPX's 2% for the next few years or longer. Please note that the context here is a portfolio diversified to include all SPX sectors along with foreign exposure and taking in a full range of attributes into the portfolio.
The reason SPX still yields only 2% is because the financial sector is still a large component and many of the biggest banks pay little or no dividend as ongoing fallout from the crisis--at least this is my opinion as to why SPX only yields 2%.
If my idea of a diversified portfolio (not that you should care about my idea of a diversified portfolio, but this is the process I am working through) can yield 4% (I've not yet come to that conclusion), and if it turns out that domestic equities only average 3-4% per year, then that yield does a tremendous amount of heavy lifting for the portfolio. From there a couple of correct country decisions and figuring out one thing to avoid (hint: US and European banks) and there is a good chance of having a "normal" return in a below normal world.
And for anyone doubting their ability to correctly select a couple of countries and correctly avoid something; they can still have that yield to fall back on.