You can do better than me
In my last post, I announced the passing of the Curious Investments Equity Income Strategy. But, what I want to make sure is that readers of this blog don’t get the wrong idea and begin to think that investing in dividend stocks is an unproductive route to go down. As with all investing strategies, it is not enough to simply pick high dividend stocks, it’s also important to understand your time frame and your risk appetite. With this in mind, it’s important to vet out your stock picks thoroughly and not just to throw together a portfolio willy nilly as if you were choosing a vice presidential candidate (ooo…).
Dividend based investing is a strategy designed for long-term investors as the benefits of using dividend income to augment capital appreciation necessitates investing over a significant time frame. As an example, let’s look at CIEIS compared to the S&P500 and another high dividend fund – the Cullen High Dividend Equity Fund (CHDEX).
| Fund | Beginning | End | Dividend Yield |
| CIEIS | $5000 | $3945 | 4.2% |
| CHDEX | $15.65 | $13.14 | 3.0% |
| S&P 500 | 1489.42 | 1274.98 | 1.88% |
As you can see, while the picks in the CIEIS fell 21% versus 14% in the S&P and 16% for CHDEX, the dividend accrued allowed for net return on the year to be -17.8%, -12.1%, and -13.0% respectively which brings the overall returns of the portfolios into a closer range. It’s hard to tell today, but one might also expect CHDEX and CIEIS to rebound swifter than the S&P in the future while continuing to generate significantly larger dividend income than the S&P. Furthermore, the dividend income from the dividend based strategies could be used as a liquidity buffer to prevent the need to take realized losses in your portfolio and allow more time to wait out the bear market that we entered after September 2007.
Some of you out there may remain unconvinced of the strength of a high-dividend strategy. After all, aren’t dividend stocks supposed to be less volatile? How did the two high-dividend strategies I discussed above manage to lose more than the S&P? My initial response is that this bear market was different from many others in the sense that many of the industries hurt worst by the disjunction in the markets just happened to be high dividend industries – real estate companies and financials. A year ago, I believed that these industries were uncorrelated enough such that even in a portfolio concentrated in five stocks, the industry diversification ought to have been enough to smooth out volatility. Over the long run, I don’t believe that these two industries will stay as correlated as they have been.
But, more importantly, as the year has progressed and real estate and financial stocks have been hit hard, those that survived and have maintained their dividends are looking like even more compelling buys. For the first time in years, you can lock in secure dividend yields north of 5% on stocks trading at multi-year lows. It’s probably the most compelling time in over a decade to put together a portfolio of dividend winners. I know that’s where I’m looking for my next few stock picks. Over the next few days, I’ll share some stocks on my watch list. For now, feel free to leave your comments and maybe drop me a few tips on high dividend stocks that you might looking at yourself.
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Comments
Dividend stocks offer great value and right now I think we are headed into a time where a premium will be placed on value stocks. We know that the credit problems in our economy aren’t over and value stocks are better during times of tight credit, as they tend to have better balance sheets. I have been blogging about this on our site at http://www.stockshotz.blogspot.com
I have been reading about how value stocks also tend to do better when the yield curve is getting steeper.
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