Why investing isn’t all about dividends
Look beyond yield for more opportunities.
Yield: It’s what drivers should do for pedestrians.
But in the world of portfolio returns, yield isn’t a life-or-death matter. In fact, price movements of stocks and bonds matter more. Together, price movement and yield constitute total return, which is what really affects your future.
Pundits often tout stocks paying an X percent dividend, or bonds yielding Y percent. Those visions of smooth returns sound great. But you may as well look for leprechauns. That’s because steady, high returns are always illusions.
The prices of dividend stocks rise and fall like all others. Bond prices wiggle, too. Your ultimate return (or loss) is the dividends – cash payments – plus (or minus) those stock or bond wiggles over time – less taxes.
Most bonds return your principal when they mature. If you hold them until then, you’ll earn just the yield. But if you sell first for any reason, you could lose some principal because bonds have price movements. That’s what I call wiggle worries.
When some investors plan their budgets, they say, “I’d never spend my principal, only my income.” They confuse income with cash flow.
You shouldn’t budge based on one piece of total return but on the whole thing, with a planned haircut from that total to allow for saving. Suppose you get 3 percent dividends yearly and expect 5 percent average annual price appreciation returns. You might spend 4 percent and save 4 percent. Some years your accrued saving would be more than 4 percent and other years less, maybe even negative. But over time you’d do just fine. It’s total return that matters, not cash flow.
High-dividend stocks aren’t inherently better or less volatile. They are “value” stocks – which do well when other value stocks (such as low priceto-earnings or low price-to-book value ones) do well. When those lag, so do high-dividend payers.
And dividends aren’t free money. They’re cash taken from the company – subtracted from the stock’s price. Dividends aren’t guaranteed, either. Firms can and will lower or kill dividends. It happened during 2008’s financial crisis.
Low- to no-dividend stocks plow profits back into future growth and do best when growth stocks outshine value stocks, like now. It simply depends on circumstances and timing.
Consider dividend-paying Microsoft and dividend-free Amazon. Since this bull market began March 9, 2009, Microsoft’s total return is 806 percent. Amazon’s is 3,050 percent. Both did great, but total return matters most.
Total return counts for bonds, too. But from today’s low yields, if interest rates rise, bond prices fall. Again, it’s about total return. Big dividends or yields may feel great, but if stock or bonds tank, you lose.
I like stocks. Why? As detailed in my April 22 column – with slightly different valuations – if American corporate earnings never rose or fell again, owning average businesses today, lock, stock and barrel, after tax, is about twice as profitable as owning the bonds of those same companies. It’s why we have so many stocks buybacks and will.
Overall, stocks will do better for you, albeit irregularly with more volatility, than bonds.
Figure out what total return you need to reach your goals. Then plan the mix of stocks and bonds with the best shot of delivering them. That may include highdividend stocks or not. Don’t limit yourself. Big U.S. dividend payers returned
25.7 percent over the rally the last two years – great – but the whole U.S. market was up 37.5 percent. As a result, low and no-dividend stocks did even better. Everything has its time in the sun, and rain.
Looking beyond yield offers more opportunities. Who doesn’t love a bigger selection – especially one that does better for you over time.
Ken Fisher is the founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.