Many investors are programmed to think first and foremost about dividends. The question we receive from so many retirees is 'what is the dividend yield?' Many people come to us with portfolios comprised of many high yielding individual stocks, which they logically conclude are less risky than owning the general stock market as a whole. Of course, dividends are an important part of one's overall return, Putting too much focus on the dividend though, rather than the investment or portfolio as a whole, can be risky. Our team looked at the industry composition of a group of high yielding stocks (as measured by Dow Jones US Select Dividend index) versus owning the S&P 500 index through an index fund. In looking under the hood, we noticed three facts:
1) The high dividend portfolio was concentrated 30% in utilities versus 3% utility exposure in the S&P 500.
2) The maximum decline (2008 into 2009) from peak to trough was worse relative to the market as a whole.
3) Even though the dividend yield was higher, the overall return was lower between start of 2008 through the end of 2017.
Focusing on dividend yield alone can actually result in a portfolio that has more company and industry specific risk. Many investors a couple years ago were invested in Master Limited Partnerships because they were yielding between 5 and 10%. People thought it was safe because it paid a dividend. When oils prices sank in early 2016, many of these funds had to cut their dividend and declined drastically in price as well. While consumer staples have historically been a defensive sector, technological innovations from companies have eroded the margins of large companies previously thought to be 'very safe.' The truth is that investing in stocks is not without risk, and there is no such thing as a 'conservative stock,' in our opinion.
Always focus on what you are actually invested in rather than just the dividend yield.