Why We Don't Double Down On Dividend Stocks

Updated: Nov 15, 2019



Ever wonder about dividend stocks and what place they should have in your portfolio? The institutional engineered model portfolios utilized by Provident Wealth Advisors contain approximately 13,000 holdings, which includes the vast majority of high dividend paying stocks. Therefore, we see no reason or clear advantage to overweight our model portfolios at this time, or any other for that matter, toward dividend stocks. We already own them. As always, we would encourage investors to remain disciplined, and not to speculate or make changes to your portfolio via dividend stocks, gold, commodities, or the hot asset category of the day based on a prediction or forecast. Empirical evidence shows that predictions and forecasts, by even the so called ‘brightest,” are wrong far more than they are right. The investor graveyards are full of so called Guru’s. Betting now that these stocks going forward will somehow have an income and investment advantage over a diversified portfolio that includes dividend stocks is not a prudent way to plan and solve for income from an academic point of view.

The use of dividend paying stocks is generally touted as an income strategy, sometimes as a way of owning “strong” stocks. Neither of these points withstands scrutiny when one examines the evidence. The tax treatment of dividends is very similar to that of capital gains, so a strategy of taking income from dividends without touching principal versus just peeling off capital gains when needed from a diversified portfolio does not provide a clear advantage from a perspective of generating income. Secondly, there is not a consensus of research that we have ever seen that would lead us to believe that high dividend paying stocks perform any better or carry less risk than the asset classes which they represent.

So, when you remove the “advantages”, what you are left with is a massively under-diversified portfolio of just a few stocks, generally representing small portions of just a couple asset classes at best. A portfolio created entirety of dividend stocks is not taking advantage of the benefits of diversification, nor would it be taking advantage of the known and well documented premiums associated with the small and value stocks.

As dividend paying stocks are almost always US large companies one should know that during a recent 15-year period, (2000-2014) large US stocks earned an average rate of only 4.24% while small and small value stocks earned on average 11-13% during the same period. Anyone who was over weighted on large US stock during this period paid a HUGE price for a lack of diversification. Large US stock also suffered from what is now famously referred to as “the lost decade” which ran from 2000-2010 where large US stocks earned a total NET ZERO, so again, tilting towards large US stocks for the sake of pursuing the perceived benefit of a dividend, would not be considered a prudent thing to do once an investor becomes aware of the implications.

Add to these facts the sheer number of “do-it-yourself” investors who have flocked to dividend stocks over the past several years, thinking that the dividend is somehow a “freebie”, and we see a classic case of investors “chasing” something that is the hot thing of the moment. We saw this in tech stocks in the 90’s and with gold more recently. Investors are well documented to pursue investments at the wrong times and for the wrong reasons. Dalbar research routinely reports that investors only garner about 1/3rd of the returns for which they are taking on risk. These are the same investors who will get surprised when these markets correct, and they lose more money than they imagined was possible. Following this event is the likely outcome that retirement income must be subsequently reduced. We are happy to provide you with several recent articles that address this important topic. The articles are titled as follows…. Dividend Stocks – Fools Gold, Beware of Dividend Stock Risk, and Ignoring The Problem With Dividend Stocks.


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