There are various strategies one can take when choosing which stocks to use in building an investment portfolio. One popular strategy is to pick firms that pay shareholders dividends. The logic is simple: no matter what happens in the market a dividend portfolio will at least create some income, which can in turn be reinvested. With inflation currently seriously impacting the finances of people around the country, though, all investors are likely thinking about their current strategy and wondering if there;s a better option. A recent study from fund firm Dimensional recently explored whether dividend investing is the right strategy for combating both high inflation and the rate hikes that are likely to define the next year of policy coming out of Washington.
In short, dividends might not be all they’re cracked up to be in this environment.
For more help building a portfolio meant to succeed in all market conditions, consider working with a financial advisor.
Dividend Stocks Definition
First, a quick review of how dividends work. Dividends are payments made to investors based on the performance of the company. They are paid on a per-share basis, so the more shares of a company you own, the more you’ll be paid in dividends. Dividends can be paid on any schedule, but quarterly and yearly dividends are the most common.
Not all companies pay dividends. Generally a company will have paying shareholder dividends as part of its identity; in other words, dividends are paid randomly, but a company makes a decision to become a dividend paying firm and stays that way.
Dividend investing is one of the core investing strategies in portfolio building; dividend investors are after income, as opposed to growth investors, who are simply looking for firms where the value of the shares is going to grow steadily over time.
Dimensional Report Findings
Dimensional is a fund firm that seeks to apply academic economic research to real-world investing questions. Noticing that some investors were looking to dividend-paying stocks to offset the inflation and rate hikes currently rocking the investing world, they sought to see if that strategy would work.
Their findings? In short, no — dividends are not the silver bullet to beating inflation or higher interest rates:
It is natural to be concerned about the potential impact of high inflation and rising interest rates on portfolios. However, we believe our analysis shows there is no reason to expect dividend-paying stocks or high dividend payers to offer more protection and higher returns during these periods. Market prices reflect the aggregate expectations of all market participants, including expectations about inflation and interest rates. Staying disciplined and broadly diversified, instead of chasing dividend stocks, may put investors in a better position to achieve their investment goals.
To come to this finding, Dimensional examined the results of dividend-paying companies going back to 1928. The average real return of dividend payers in high-inflation years was just 5.3%, while it was 7.1% for non-payers.
The Bottom Line
Inflation poses a serious problem for Americans in reducing the value of their money. While it is tempting to look for a quick fix to the issue through smart investments, investors won’t find that miracle cure by chasing dividend payments. Instead, focusing on a diversified portfolio and overall discipline is the best way to ride out the tough times — which, despite what it may feel like, will not last forever.
- If you want help navigating the current economic climate, consider working with a professional. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- For a look at what your investments might look like down the road, use SmartAsset’s free investment calculator.
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