In this low interest rate environment, income-minded investors, who have some tolerance for risk may find dividend-paying stocks attractive. In fact, nearly 40% of S&P 500 companies have dividend yields above the 10-year US Treasury bond yield.
The appeal of dividend-paying stocks is easy to understand as they can provide investors with regular income regardless of market conditions. In addition, many dividend paying companies increase their dividends over time thereby creating a growing cash flow over time versus the fixed coupons of bonds. It is important to note, however, that equities typically exhibit a higher volatility of returns than bonds, and the underlying company may choose to increase, decrease, and/or eliminate the dividend at any time. Regardless, we consider dividend paying equities an important part of a well-diversified income-generating portfolio.
If you are considering adding dividend-paying stocks to your investment mix, keep the following thoughts in mind.
- Dividend-paying stocks provide diversity to an income-generating portfolio. Given the current bond market, stocks with above-average dividend yields may compare favorably with bonds and may act as a buffer should conditions turn negative within the bond market.
- Dividends benefit from continued favorable tax treatment. The American Taxpayer Relief Act extended the Bush-era tax cuts, which are capped at a maximum of 15% on qualifying dividends for most taxpayers. The rate rises to 20% for those who earn over $450,000.
So how does Coldstream typically incorporate dividend-paying stocks to a client’s portfolio? We have been actively managing dividend paying stocks through our Coldstream Dividend Growth Strategy for over ten years. The strategy has added value to the overall total return of our client portfolios invested in this strategy.
The individual stocks that make up this strategy are filtered for the following attributes:
- Large Cap Common Stocks: Companies with a market capitalization value of more than $10 billion.
- Value: A stock that tends to trade at a lower price relative to its fundamentals.
- Strong Free Cash Flow: Cash that a company is able to generate after spending to maintain or expand its asset base.
- Dividend Growth: A rising dividend of 5% or greater anticipated over the next rolling 12 month period.
- Tax Efficient: Low portfolio turnover ratio of roughly 35%.
Equity markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. As well, past dividends are not a guarantee of future dividends. If you would like to learn more about our Coldstream Dividend Growth strategy, please contact your Coldstream Relationship Manager.