Summer Client Letter {Part IV}

Switching gears, you speak about the importance of dividends.  Can you update us on your thoughts?

Sure.  Dividends have long been an extremely important part of an investment’s total return.  Total return is the appreciation or depreciation of an asset plus the income it returns from dividends.  For example, if stock XYZ appreciates 4% this year and also pays a 2% dividend then your total return on XYZ is 6%.  The long-term appreciation of most equities derives something like 40% of their return from dividends.  I think dividend investing may be the hardest thing for clients to analyze because it often doesn’t show up on account statements or portfolio reports in a way for investors to understand its impact on their investments. Your brokerage statements will likely show when you bought an asset and also may give you estimates of the dividend yield if applicable.  But the only way it shows the effects of dividends is by how it impacts the bottom line of an account.  That may be masked by market volatility, client withdrawals and when the payouts occur.   So for example a $100,000 portfolio receiving $3,000 of income has a 3% yield, not taking any price movement into account.  But if at the end of the year the market has declined 10% that client will show a loss for the return period.  Even though the investor has banked the dividends in his account, those market losses in this example will mask their addition.  However, we’d also note that the dividends added to the portfolio would mute that same market decline.  In our example above, in case of a 10% market decline, the portfolio would be down 7%.  Of course the inverse happens when markets advance.

One of the reasons to buy ETFs is for their cash flows in the form of dividends.  We have an ETF strategy based around this.  Not only is there diversification from owning a basket of securities but you also will likely be the recipient of future dividend increases.  As an example, one of the ETFs many of our clients own has a record of raising dividends almost every year due to the nature of the stocks in which it invests.  It’s first recorded quarterly dividend in 2003 was .288 cents per share.  This ETF now pays .675 cents per quarter.  That is a 134% increase in the dividend payout.  Now as a disclosure, the period March 2008-September 2009 saw its payout decline due to economic conditions and this ETF lost nearly 45% in value.   However, the ETF’s worst quarter saw a dividend payout of .395 cents and it has steadily increased its payout since then.  Buying this ETF at an opening price of $50 in 2003 and holding through this June would have paid you a cumulative $26.87 per share in dividends and closed last month with a share price of $84.  That is the power of dividend investing.~  Over time you should also see price and income appreciation as the economy expands for dividend related ETFs.  Think of ETFs with dividends as securities with the potential for price appreciation plus an income bonus. 

Thank you once again for your continued trust and support.   We're going to be in and out a bit over the next few weeks as we take advantage of what we hope will be the traditional summer downtime in the markets.  Posting will be a bit sporadic during this period unless something warrants us breaking in.  Our next post will be Tuesday.

Chris

~We have not named the security discussed in this article so as to not be seen as providing a recommendation of investment.  We are happy to discuss this ETF individually with clients as to its identity and how it fits into our portfolio strategies.  Information taken about the historical dividends related to this ETF and prices comes from sources deemed to be reliable but cannot be guaranteed.  We will happily provide the information on the dividend and price history upon request.