According to a recent survey by the Employee Benefit Research Institute, workers’ and retirees’ confidence in having enough money to live comfortably throughout retirement dropped significantly in the past year, the most since the 2008 financial crisis. The rising cost of living, volatility of the financial markets, and risk of not having a big enough nest egg were cited as some of the reasons.
What can investors do to improve their retirement prospects AND provide a little more peace of mind in retirement? Building an investment strategy with a “dividend growth” focus might be the smartest move any investor could make.
Let’s dive deeper and explain why. As the following chart illustrates, there is no question that investors need their assets to grow and also provide a rising stream of income to offset the loss of purchasing power over time.
Next, as we see below, dividend growers have historically provided MORE RETURN with LESS RISK to investors.
But what about that recession that is predicted to come any day now? Won’t our dividends get wiped out? Perhaps not; as we see below, based on historical data, dividends have fallen—on average--by 1% during recessions.
Here are some simple examples of the long-term power of dividend growth investing, illustrated with a few plain vanilla consumer staples companies:
In 2015, McDonald’s (MCD) paid an annual dividend of $3.44 per share and traded at $96 per share for a dividend yield of 3.58%. Today, MCD pays an annual dividend of $6.08 per share and trades at $295 per share. Today’s buyer of MCD receives a dividend yield of 2.06%. But the long-term shareholder enjoys a yield-on-cost equal to 6.33% ---PLUS the fact that the stock price has tripled since 2015. [Note: “yield-on-cost”(YOC) is simply the current dividend divided by the price-per-share at which the stock was originally purchased. In this example, $6.08 dividend/$96 original price =6.33% YOC]
In 2013, Procter & Gamble (PG) paid an annual dividend of $2.40 per share and traded at $79 per share. Today PG’s annual dividend is $3.76 for a YOC to the long-term investor of 4.76%.
Let’s stretch this out a little bit though…. and really show the true long-term power of this strategy!
In 2004, PepsiCo (PEP) paid an annual dividend of $.92 per share and traded at $49 per share. Today, PEP pays an annual dividend of $4.60 per share for a YOC of 9.39%!
Using the simple “4% rule” for distributions, long-term disciplined investors today can earn well over 4% in (only!) dividends from 3 boring companies that sell hamburgers, soda, potato chips, razors, diapers, and detergent!
To summarize, an investor in these 3 companies benefited from the following: an increasing dividend yield (which helps meet the need for a rising income stream during retirement), a larger nest egg due to the higher stock prices, and greater peace of mind that comes with less volatility (relative to most other available investment options.)
Furthermore, this type of strategy can be implemented in a low cost, transparent and tax-efficient way! And in today’s investment world where there is an ETF for everything, investors have no shortage of ways to invest in a dividend growth strategy.
That said, proper due diligence is necessary before investing in any “dividend growth” investment; it is always important to understand the history, mechanics, target holdings, manager tenure/track record, risks as well as a variety of other important factors when investing in any strategy or fund.
As always, please feel free to reach out to us here at NCM Capital Management with your questions and/or thoughts.
Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.