In recent years, high-dividend stocks have become especially popular among investors looking for income in their portfolios. A new article from asset management firm AllianceBernstein, though, posits that these shares are not enough for building an effective portfolio. Rather, the three authors of the piece — all certified financial analysts — recommend building a “systemic approach may produce a more diversified strategy that results in more core-like equity exposure.”
For more help with building your own portfolio — whether producing income is important to you or not — consider working with a financial advisor.
Dividend Stock Basics
First, it’s important to make sure you understand exactly what dividends are and how they work. Essentially, dividends are payments made by companies to their shareholders, giving back some of the money the firm has made. Dividends are most frequently paid either quarterly or annually, but exactly how often is determined by each company. A dividend is paid per share, so how much you make depends on how many shares of the company you own.
Let’s say you own 100 shares of the XYZ Widget Company. If the company pays an annual dividend of $15 per share, you’ll get $1,500 dollars at the end of the fiscal year.
Anyone can invest in dividend stocks, obviously, but they are especially popular among income investors. Income investing is a strategy that seeks not just growth in terms of portfolio value but money coming directly into the investor’s wallet. That money can be used for any expenses, but many investors choose to simply reinvest it in the company, building an even more valuable portfolio.
Dividend Stocks Performance
High-dividend stocks actually had a very good year in 2022 — providing a strong foundation for income portfolios, according to AllianceBernstein. The S&P 500 High Dividend Index went down just 1.1%, while the regular S&P 500 went down 18.1%. It goes back even further than that, actually; since 1984, the excess return of the top 20% of the Russell 100 Dividend Cohort has been 1.32%.
There are downturns for high-dividend stocks, of course. From October 2006 to February 2009 high-dividend stocks underperformed by 22.59%, while lower-dividend stocks tended to overperform.
High-Dividend Strategies and Unintended Biases
While it is understandable that high-dividend stocks can be a good way to build an income portfolio, AllianceBernstein writes that focusing on only these stocks can lead to an unbalanced portfolios:
A basic collection of the highest-dividend stocks results in natural tilts toward industries where robust dividends are most common—such as utilities, energy, healthcare and consumer staples. They also tend to be relatively light in exposure to high-growth companies that reinvest profits instead of distributing them.
Some high-dividend investing strategies actually exclude all stocks that don’t pay dividends. This eliminates 19% of the market cap of the S&P 500, which can lead to your portfolio lagging behind the market.
The Bottom Line
High-dividend stocks are good investments for those who want to build an income portfolio. Focusing only on these stocks, though, can lead to significant biases and result in missing out on potentially strong investments.
- A financial advisor can help you build a strong and balanced portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted 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.
- Use SmartAsset’s investment calculator to see how your investments could grow overtime.
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