Across the advisor community, we often hear individual investors coming to their advisors infatuated with generating investment returns through high dividend-paying stocks. While this strategy may have been praised by industry experts at one point in time and even today, the data and evidence over the past several decades have shown that there are significant tradeoffs that we believe investors should be aware of when focusing on investing only in firms that pay dividends.
Dividend-paying stocks are sometimes seen as a ballast to a portfolio, particularly during periods of volatility, due to their ‘regular’ income stream. However, companies paying dividends have the flexibility to cut their dividends and this often coincides with economic downturns. In fact, more than half of dividend-paying firms cut or eliminated those payouts following a financial crisis1. More recently, in the first three quarters of 2020, dividends from each dollar invested in US markets decreased by 22% compared to the same period in 20192.