Dividend-Stock Investing: Gimmick or Neutralizer of Volatility?
When the market dropped sharply this summer, Laila and Dryden Pence, principals of Pence Wealth Management in Newport Beach, Calif., relied on dividends to soothe their clients’ concerns about lower returns.
“If their stock prices go down, their yield remains the same because no companies reduced their dividends,” says firm president Laila, explaining the attractions of investing in dividend-paying stocks to her clients.
She relies on her husband, Dryden, leader of the $1-billion-in-assets firm’s investment committee. For investors who want to accumulate, he believes a dividend strategy lets clients have cash for buying undervalued stocks during market dips too. And he recommends it for those, such as retirees, keen to maintain income stability.
“Cash flow trumps volatility,” he says. “If you build cash flows, you have some dry powder that you can use to buy when the market dips.”
The strategy has helped him outperform the S&P 500 index by 4% to 6%, Dryden asserts. Roughly 50% to 60% of his clients’ assets are invested in companies that have consistently paid dividends. “Dividend paying is indicative of the long-term health of the company,” he says.
Not everyone endorses dividends-focused strategies, and Brent Everett counts himself among the naysayers. “It’s a sales strategy more than anything,” says the partner and chief investment advisor for Talis Advisors in Plano, Texas, which has $200 million in assets under management. “The fact of the matter is that when the cash is distributed, the stock value drops the same amount,” Everett explains. “We prefer to operate in what we call the ‘synthetic dividend’ mode,” he says. “If the client needs income, we can get it simply by selling the stock.”
In other words, Everett is unwilling to cede control of how much and when his clients take money off the table with respect to a particular stock to the company’s board of directors.
In addition, Everett says a dividend-focused strategy means more drift from portfolio-diversity goals. “You’re actually reducing diversity” by chasing dividend-bearing issues, he asserts.
Everett also believes many commission-taking advisors — and Pence Wealth Management isn’t one — pursue dividend strategies to goose production at their clients’ expense.
“I don’t think there is a wirehouse out there that hasn’t pitched it in the last few years,” says Everett.