Dividend-paying stocks may be the best option for investors looking for income, Jason Brady, managing director and portfolio manager of Thornburg’s limited-term income and U.S. government strategies funds, said at the annual spring forum of the Financial Planning Association’s New York chapter last week.
“Stocks are like Ponzi schemes unless they’re paying cash—you’ve got to get someone to buy from you at a higher price,” he said.
Instead, he recommended that investors turn their attention to the yields available from equities. While derided as a waste of money companies could be using to reinvest in growth during the dotcom boom, the opposite is actually true.
“You’d think companies that don’t pay dividends would do better because they’re reinvesting the money, but they screw it up,” Brady said, whereas companies that have to pay out a chunk of their earnings to shareholders are more judicious about where they spend what’s left.
Traditional alternatives to dividends aren’t looking so hot right now. Many investors headed to the relative safety of money market funds in 2008 and then to unusually high-yielding corporate bonds in 2009, but time’s up for both strategies.
“Cash stinks, and there aren’t any great corporate bonds out there anymore,” Brady said. “People are reaching for bonds are in a dangerous place because there’s a lot of long duration coming out.”
While dividends aren’t a quick earner for investors, their returns build up over time. In a hypothetical scenario, Brady calculated the total dividend payouts of a 1970 investment in the S&P 500, ignoring changes in price of the underlying equities. By 2009, the yield on the initial investment was 24%, even though share prices were down 25%, he said.
Confounding another myth that stocks always lose to bonds in the long term, Brady countered that this is only true if you don’t factor in dividends.
He suggested looking overseas, where dividends are more common, to find the best yield on a growth stock.
“The U.S. has a crappy dividend culture because we tend to think of the market as a casino,” he said. “I can turn a 2% yield to a 4% yield just by going to Australia. Global dividend-paying stocks are really underappreciated.”