Why Dividends Are So Important

Most people, when they retire, need income. There are only a few places to bring home income today. Retirees get income from their pensions while others receive monthly checks from Social Security. The majority of us will be converting our savings into investments that create monthly income.

The major problem for all of us today is the low interest rate environment. Low interest rates for mortgages, car payments, school loans, and other forms of debt is a godsend and is considered a helpful miracle. But for the great number of people (especially retirees or soon to be retired individuals) low interest rates are basically just plain harmful. Low rates are frustrating because you can’t earn any interest from them. For example, certificate of deposits, the favorite investment for our parents and grandparents, are yielding extraordinarily low rates — lower than 1%. Did you know that the 10 year treasury today is yielding .68%. Now that’s for 10 years!

Well what about rising interest rates in the near future? Jerald Powell, Chairman of the Federal Reserve stated when asked about raising interest rates, “we’re not thinking about raising rates. In fact, we’re not even thinking about thinking about raising rates!”

In fact, a policy of “zero interest rates” from nearly every major central bank in the entire world certainly presents a challenge to investors seeking income as one of their main portfolio goals.

We believe, that one of the answers to a very low interest-rate environment is to build a high-quality portfolio consisting of blue chip equities that offer dividends to their shareholders.

Now when you Google “dividends” you will find hundreds if not thousands of entries. Online entries start with, “what is a dividend” from Nerd Wallet, to explanations stating the best stock sporting the “highest dividend to buy right now!” by the Motley Fool. There are hundreds of books offered for sale on this topic as well as thousands of “get rich quick” and “live grand only on your dividends” articles.

Well that all sounds pretty darn good in fantasy land. But the truth is, dividends are a sum of money paid regularly by a company to its shareholders out of its profits.

Sounds pretty simple. The trick is to buy companies that will be profitable and that can afford from their profits to pay the dividends. The only way to earn dividends is to invest with companies in the stock market. Stocks coupled with their dividends matter quite a bit. In fact, dividends are responsible for around 40% of total annual market returns over the long run.

It would be easy to find a high-yield dividend on a stock promoted by various websites and immediately gravitate towards that figure. The problem with that mindset is that a stock with a very high yield can often come with significant setbacks. A very high yield might simply be high because the security is under performing, watching its price fall while its yield rises. A very high yield won’t do much good if your capital base is losing money. Like so many things in our world today investing can be quite complex, because there’s so many moving parts. Enjoying dividends from the stocks in our portfolio are one of those complexities best left for the professionals.

We at Woloshin Investment Management have a process and follow strict rules doing our research looking for blue chips that pay rising dividends before we select them to be in our portfolios. When companies consistently raise their dividends over a number of years it shows a sign of a healthy company that we may want to invest in. Of course, rising dividends fundamentally is not the only metric to buy stocks.

The stock market has been very volatile and has been seen to be tumultuous. Utilizing our active management, we have been very fortunate with our client’s portfolios to have missed the major declines in the first quarter. Much more major volatility maybe just around the corner. Your management team is standing at the ready. As always, we are very grateful and thank you for your business

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Warmest Regards,

Your friends at Woloshin Investment Management