Investing for Total Return or High Dividend Yield?
Investing for Total Return vs. High Dividend Yield has been an endless discussion. Attempting to generate high levels of income from your retirement or investment accounts has historically come with a trade-off of lower total return or taking on more risk. Many retirees try to maintain the principal value of their investments by living off of the dividends and interest of their investments. However, in a low interest rate environment, stretching for above market yields often comes with risks. One risk can be less financially sound companies, or in our example below, the potential of significantly lower returns.
High Dividend Yield - Example
Look closely at AT&T ("T") and Exxon ("XOM") as examples over the past 10 years.
AT&T had an average yield of ~ 6%
Exxon had an average yield of ~ 4%
While the 10-year U.S. Treasury averaged ~ 2%, a yield of 2x or 3x certainly sounds enticing.
AT&T Dividend Yield - 10 Years click on image to enlarge  | Exxon Dividend Yield - 10 Years click on image to enlarge  |
Total Return - Wins by a Significant Margin
Here’s the problem with looking exclusively at yield when it comes to investing in the stock market… over the past decade, the stock market (S&P 500) has crushed AT&T and Exxon on a total return basis (price plus dividends). The high dividend yield may seem like a no-brainer, or even make you feel warm and fuzzy, however the charts below demonstrate that total return, not yield, should be the priority in protecting or growing value over the long-term.
When considering income-focused assets for your portfolio, simply targeting the highest dividend yielding investments is just the first step in scanning the investment universe for opportunities. Further analysis should be warranted – including, but not limited to balance sheet strength, cash flow durability, competitive advantages and moat, pricing power, industry in advance/decline, potential new entrants for disruption, regulatory framework, etc.
10 Year Total Return of AT&T vs. S&P 500 click on image to enlarge  | 10 Year Total Return of Exxon vs. S&P 500 click on image to enlarge  |
Create Your Own Income
We know that many investors are averse to spending down principal in their retirement years but if you’re happy with your current portfolio, you can create income by simply selling some shares of the stocks, index or mutual funds you own. The remaining portion of your portfolio will still compound if the stock market rises over the long-term.
Taxes also play a factor, but if you sell shares at long-term capital gains rate (under current tax law), the tax rate is the same as ordinary dividend rates.
Consult with your Sandbox Financial planner or Contact us Today to start the conversation on investment strategies or retirement planning.