What’s the proper role of dividends in your portfolio? With fixed-income investments paying so little and a 15% tax rate on dividends for most middle-income taxpayers, many investors are looking to dividends for yield. And companies like Verizon and AT&T, now yielding in excess of 4% compared to just 1.88% for the 10-year U.S. Treasury, sweeten the pot.
I’ve always stressed that it’s important for equity investors to buy more than just dividend-paying stocks. In “Global Dividend-Paying Stocks: A Recent History,” Stanley Black offers a few meaningful statistics that support my thinking:
- By focusing on only dividend payers, investors exclude 35%–40% of domestic companies and about 47% of available small-cap stocks. Therefore, the portfolio cannot be truly diversified.
- The data show that the percentage of firms paying dividends globally dropped from 71% in 1991 to 61% in 2012, with declines occurring in both US and international markets.
- As the financial crisis of 2008–2009 demonstrated, companies do reduce or cut dividends in the face of declining profits and economic conditions. In 2009, 14% of firms around the world eliminated their dividend, and 43% of firms reduced their dividend.
Clearly, appropriately diversifying your equity exposure requires looking beyond dividends. And, dividends are not the sure bet they are often billed to be and should not be a factor in deciding to buy or sell a stock.