The quest for yield has driven investors from low-risk bonds, where yield has been scarce, to the growth and income that dividend-paying stocks provide.
The faddish nature of this style of investing, and the attendant risks of participating in a crowded trade, have been duly noted. I appreciate that Eric @ SERVO looks at this strategy from a different angle, noting that it has not outperformed historically. Particularly helpful, he notes the underlying motivation that has made dividend investing so popular:
If you buy a basket of high-yielding stocks or stocks whose dividends are growing, you can simply spend the cash flow without being bothered to sell shares. There's a behavioral component as well -- we feel more comfortable when we aren't forced to sell precious principal."
Read Eric's article here to consider his market-history angle in full. A Nifty-50-style dogpile on dividends, together with a challenge to dividend companies' long-term returns, together provide investors ample food for thought.
While Eric's return table shows an enormous gap between his asset-class style of investing and dividend-growth stocks, I can hear the argument for paycheck-style investing approaches. (I can also hear Eric's counter-argument: you're going to run out of money.) But beyond that, I think all investors should be concerned whenever a certain investing style becomes dominant - because it invariably falls apart right when it can crush the maximum number of investors.
Please share your thoughts on this in the comments section below.
Meanwhile, today's advisor-related links start off with three other articles on the desperate quest for yield.
- Provocative analysis from Ian Bezek: Amid bond selloff, has the hunt for yield already ended?
- Kate Stalter warns of the risks in alternative lending as a means of boosting yield.
- And The Heisenberg warns of risks in junk bonds.
- American Funds: how to get tax deductions for your retirement plan contributions.
- Jack Waymire on the top digital marketing trends for financial advisors.
- Cullen Roche: Investors shouldn't overreact to the presidential election.
- Kristina Cooper of Allianz Global Investors compares the candidates' spending plans.
- Jake Zamansky: SEC is clamping down on advisors with regulatory disciplinary history and at risk of future misconduct.
- Kevin Wilson: Sources of severe market risk are building.
- Jeff Malec: Make your clients happy with managed futures - before the next round of volatility.
- John P. Reese: Choose underperforming managers.
- 720 Global: Why do central bankers, of all people, want inflation?
- For more content geared to FAs, click here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.