Asset Allocation 'Vs.' Dividend Growth Investing: A Handy Comparator

 |  Includes: INTC, JNJ, PG, SPY
by: David Van Knapp

This is my 100th article. It also is coming up on the two-year anniversary of my first foray into the dividend debate, "Why I Love Dividends." I wrote that article in response to several previous articles on Seeking Alpha that criticized or dismissed dividends. I saw nothing in defense of dividends, and as I had come to the view that dividend growth investing makes a lot of sense, my article was simply meant to present the other side-or more specifically, to show that there was another side.

At that time, the Investing for Income section did not exist. The community of dividend investors had not coalesced, although most of the individuals were already around. I expected my article to generate some discussion, and I was hoping to learn from it. As I was committing more of my family's assets to the dividend growth strategy, I wanted to hear anything that might show me I was making a mistake.

That happened and more. In the ensuing two years, the debate has become louder and hotter. It has unfortunately devolved at times into name-calling and dismissive, disrespectful comments. Nevertheless, despite the useless heat, a lot of light has been shed on the subject. I know that I have learned a lot, not only from those on the other side, but also from other dividend growth investors.

I thought it would be fun and educational to try to distill the views of each side into a side-by-side comparator. When I was working, our sales staff developed comparators all the time to show customers the differences between our products and those of our competitors. Naturally, we did this when we felt our products had advantages and the upper hand. My purpose here is a little different. I've tried to be neutral and simply produce a "compare and contrast" table.

Neither investing for total returns nor dividend growth investing is monolithic. There are many flavors of each. To represent the total returns approach, I have drawn heavily (but not exclusively) from Larry Swedroe's articles and comments, as I have come to see him as the most articulate and well-rounded of the total return contributors. For the dividend growth approach, I have drawn not only from my own views, but also from many articles and comments produced by the dividend growth community.

For each scenario I ignored the most extreme views as not representing the mainstream or majority. I also left out propositions about which there is no disagreement, such as that the sooner you start saving for retirement, the better. Naturally, these are all judgment calls, and if you think I screwed something up, please mention it in the comments.


Asset Allocation

Dividend Growth Investing

Principal Long-Term Goal



Secondary Long-Term Goal(s)

Safety of principal


Best risk-adjusted returns

Minimization of risk to income stream



Most Proponents Are…

Registered Investment Advisors and other investment professionals

Self-directed individual investors

Role of Investor



Portfolio Building Blocks

Funds representing non-correlated asset classes

Dividend growth stocks

Theoretical Foundations and Supporting Data

Academic studies


Peer-reviewed professional journals



Personal experience, including multi-generational family experience


Numerous non-academic studies


Multi-decade performance record of dividend growth stocks

Pick Stocks?



Use Funds/ETFs?

Yes, usually exclusively

Not often

How Many Building Blocks in Typical Portfolio?



Role of Dividends

Minor-they add perhaps 1%-2% to total returns across entire portfolio.

Central-They provide the income which is the primary goal.

Role of "Value"

Moderate-Is one defining characteristic of a few stock asset classes.

Central-Purchasing at good valuations is part of due diligence process.

Ever Sell/Trade?

Yes, to rebalance.


Yes, to change allocations based on changed life circumstances.


Yes, if assumptions upon which plan was based change.

Yes, when a stock cuts its dividend or displays other warning signs of danger to dividend.


Yes, when a stock balloons in value and profits can be redeployed to increase portfolio's yield.

Typical Views of Proponents

Only sensible goal of investing is to maximize risk-adjusted total returns.


Individual investors are riddled with human flaws and therefore make bad investing decisions.


Don't assume you can pick stocks successfully, because most investors can't.


Most individual investors delude themselves about how well they are doing and don't know what their returns actually are.


There is no timing involved. Rebalancing is not timing.


Dividend growth portfolios take on too much risk, because they are exclusively made up of the asset class "stocks"

Main goal is sufficient and rising income, not total returns.


Can tolerate capital declines, because they usually do not influence rising dividend streams.


If you live off income in retirement, you cannot run out of money.


Market declines provide buying opportunities.


When market declines, I get "paid to wait."

Common Misconceptions about Each Approach

That asset allocation seeks alpha. Rather, goal is to replicate blended returns of "all" asset classes.


That 2008 "proves" that the approach does not work.

That dividend growth investors seek alpha. Rather, they seek reliable growing income.


That 2008 "proves" that the approach does not work.


That dividend risk is correlated with stock market risk


That all dividend growth investors allocate 100% of their assets to this method

Something that Really Frustrates "Other Side"

Refusal to post actual results, even of model or illustrative portfolios




Mocking, dismissive, or condescending attitude


Apparent inability to see growing income as worthy objective or alternative to total returns


Equating retirement with withdrawals

Swarming to answer questions or criticisms


Questioning conventional wisdom


Lack of academic/professional foundation for approach

How Ideally Finance Retirement?

Withdrawals: Selling assets without ever running out of assets to sell.

Collecting income and rarely or never having to sell assets.

How Can That Work?

If remaining assets expand in value to offset liquidations.

If income (from all sources) is enough to cover all retirement expenses.

Typical Stocks Held

Thousands (via funds). Few individual stocks are purchased.


Procter & Gamble (NYSE:PG)

Johnson & Johnson (NYSE:JNJ)

Issues Within Approach

What truly is an asset class?


How many asset classes are there?


Should a portfolio contain any individual stocks or other instruments in addition to funds/ETFs?

Yield on cost-useful or useless metric?


High yield, slow growth or low yield, high growth? Is that even a valid distinction?


How many stocks are needed for sufficient diversification?


What is a minimum useful yield?

Click to enlarge

Disclosure: I am long INTC, PG, MCD.