Dividends, Market Volatility And Your Portfolio

by: Roger Nusbaum

A Barron's roundup;

The Trader column gave a lot of real estate to Peter Andersen of Congress Asset Management and his process for screening dividend stocks. He would rather buy companies with low payout ratios and room to increase their dividends which typically means stocks with lower yields as opposed to the highest yielding stocks.

In a comment I didn't precisely follow, Andersen said (I'm paraphrasing) that there are plenty of stocks with 4% yields and, using a college analogy, those stocks are the graduates, they prefer to buy freshmen who will go on to become 4% yielders. It was implied that the stocks he is talking about will provide more total return but it was not spelled out as such.

Dividends are very important but I am not one to have the entire portfolio in some sort of dividend strategy. There are various related stats that are similar to the one I have referred to before which is that since the 1920s dividends have accounted for 42% of the total return of the market. The more yield that can be had from the portfolio then the less market volatility that needs to be taken on up to a point. If the market's total return in a given year was 2% dividends and 8% price appreciation then one way to look at is is that a portfolio that yields 3% would only need to have 7% in price appreciation to keep up with the market.

Merely keeping up with the market may not seem so hot but people with an adequate savings rate that can stay reasonably close to the market over time have a very good chance of having enough money when they need it.

The reason I say up to a point above is that a portfolio that yielded 10% would take on much more volatility than the broad market but unfortunately this would probably not become evident until a large decline had started to pick up steam - but by then it would be too late.

There was an article about long term care insurance in terms of how it has evolved and what the limitations are along with a specific type of combo policy that might mitigate some of the limitations. It concluded with a strategy of using different types of policies.

I am not an insurance agent so I won't address any specifics (can't add any value) but this is something that people need to investigate and sort out for themselves--or get professional help with sorting it out.

Lastly the interview was with Byron Wien. Among other things, he is favorably disposed to emerging market equities. There was one nugget though that I really liked from the introduction paragraph.

"I'm so anxious to go to work, and I'm almost 80," says Wien. "So to be excited about going to work at that age is a blessing."

This ties in with a theme I have been writing about for years. I personally don't want to ever have to worry about social security such that I would be in a lot of trouble without it. I also believe that the sense of purpose that goes with having a job of some sort, past the normal retirement age, makes for healthier aging.

It will not work out that everyone can do this which is why it is so important to save a lot. A healthy portfolio balance combined with some sort of income beyond Social Security obviously increases the odds of successfully weathering any sort of financial storm or would make for a better quality of life.