Young Research & Publishing Inc.

Investment Research Since 1978

The Unvarnished Truth of Higher Dividends

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The last few months have been brutal—but much more so for some stocks than others. Earlier this year, stock pickers spouted off about the merits of bank stocks. An article in one financial daily said, “Yield-starved investors soon may have another place to reap higher dividends: bank stocks.” That hasn’t exactly played out as expected. A bank exchange-traded fund, SPDR KBW Bank (KBE), is a basket of bank stocks, with JP Morgan Chase, Wells Fargo, Citigroup, U.S. Bancorp, and Bank of America making up over 70% of its holdings. From July 5 through midday Monday, the fund was down a devastating 30.3%. Its current dividend yield is only 1.5%.

Consumer staples and utility stocks have fared much better over the same time frame, with exchange-traded fund iShares S&P Global Consumer Staples Index Fund (KXI) down a manageable 8.7% and iShares Dow Jones US Utilities (IDU) down 4.3%. They yield a better 2.6% and 3.6%, respectively. The Dow Jones Industrial Average, for the sake of comparison, was down 15% and yields only 2.8%.

For perspective, let’s look at how each of these stock components would look in a balanced portfolio using equal portions of stock and bonds and 10% gold, for a mix of 45%/45%/10%. I’ll use Vanguard’s Short-Term Investment-Grade Fund (VFSTX) for the 45% in bonds and SPDR Gold Trust (GLD) for the 10% in gold. They combined for gain of 0.70% from July 5, through midday Monday.

If the stock component (45%) of the portfolio were in bank stocks (KBE), the portfolio would be down 13%. One with an equal mix of consumer staples (KXI) and utilities (IDU) would have lost only 2.2%. In order to get back to even, the bank portfolio would need to gain 15% while the consumer staples/utilities portfolio would need a gain of only 2.25%. Clearly, owning the right dividend-paying stocks makes all the difference in the word. For yield-starved investors, this has been the unvarnished truth for the last few months and probably will be for many more to come.

 

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.