Sydney B. from Tucson, AZ asks: Hello Mitch, with interest rates at higher levels these days, do you think dividend-stock strategies have lost their appeal? Dividend stocks may make sense when investors can’t earn interest on cash, but that’s different now. I’d be interested to hear your thoughts, thank you.
Mitch’s Response:
Thank you for sending me an email, Sydney. There are several insights to glean from this topic, so thanks for asking.
If we look at just the very recent past, it appears that growth sectors like technology – whose companies tend not to pay dividends – have widely outperformed more mature businesses like banks, manufacturers, staples, and utilities where dividends are more common. The technology surge in the wake of the pandemic, combined with growing enthusiasm for AI, has catalyzed this disparity. Somewhat anecdotally, investors pulled $21 billion from dividend funds over the past year, while adding $12 billion to broader equity funds.1
In your question, you suggest that higher interest rates are a key reason why investors have favored growth stocks over dividend-payers recently. But in my view, it’s more about the business cycle and shifts in market leadership, which sometimes take years or even decades to play out. It’s also worth pointing out, however, that dividend stocks have indeed done well over the past several years, just not as well as growth stocks.
Build Your Ultimate Retirement Portfolio
While the concept of building a retirement portfolio may seem straightforward, the reality often presents a maze of challenges—from market volatility to unforeseen downturns—that can derail even the most carefully laid plans.
To stay on track, I recommend defining your investing objectives, determining your asset allocation, and managing investments over time. Our free guide, 7 Secrets to Building the Ultimate DIY Retirement Portfolio2, will help you do just that.
You will get insight on:
• How to accurately establish your retirement income needs
• The two phases of determining your asset allocation
• Developing an investment discipline that allows you to get good results over time
• Investing rules to help you avoid self-sabotage
• Plus, our views on key steps to create and maintain the ultimate retirement portfolio
If you have $500,000 or more to invest, get this guide to learn our ideas on building and maintaining a retirement portfolio to potentially achieve your long-term goals.
Get our FREE guide: 7 Secrets to Building the Ultimate DIY Retirement Portfolio2
Leading up to 1950, dividends played a much larger role in total return (~80%) for the U.S. stock market than they have over the past decade (~30%). Dividends have also been lower recently, with the average dividend at about 2% over the past 25 years, compared to a long-term historical average of 4.3%.
I think this dynamic could shift again looking forward. As many of the technology behemoths mature and begin to look more like value companies, investors may begin to demand more income in the form of dividends. Lower expected interest rates in the future may also bolster the case for high-quality dividend payers.
From an investment standpoint, an investment’s return is comprised of capital appreciation (or depreciation) plus dividend payments. A stock’s price will go up and down over time, but a dividend payment is always positive once it’s made. What’s more, dividend payments are generally more predictable if an investor scrutinizes a company’s dividend payment history and earnings from quarter to quarter.
At Zacks Investment Management, we look for high-quality companies paying dividends they can sustain and also grow over time. I tend to see a dividend-stock strategy as a middle ground between a fixed-income strategy and a high-growth strategy, part of a diversified approach that can serve to reduce overall portfolio volatility. In this sense, a well-constructed dividend strategy has not lost its appeal – far from it.
If you’re looking for other investing tools to help shape your financial portfolio, I recommend downloading our free guide, 7 Secrets to Building the Ultimate DIY Retirement Portfolio3.
This guide provides a step-by-step blueprint for building and maintaining a retirement portfolio that will potentially help you reach your long-term investing goals. You get insight on:
• How to accurately establish your retirement income needs
• The two phases of determining your asset allocation
• Developing an investment discipline that allows you to get good results over time
• Investing rules to help you avoid self-sabotage
• Plus, our views on key steps to create and maintain the ultimate retirement portfolio
If you have $500,000 or more to invest, get download your free guide today!
Disclosure