Having worked in the financial sector for over 25 years, looking after clients and their investment portfolios, I have had many conversations about dividend income and the safety net that some investors believe this provides. My belief is that focusing solely on dividend paying stocks has been borne out of a stockbroking mindset that builds portfolios to meet their client’s income requirements using mainly, high yielding UK shares.
Some companies have always been renowned as good dividend payers, such as telecoms, utilities, pharmaceuticals and, albeit on and off, financials. These companies attract shareholders largely because of their income stream and even mentioning the possibility of a dividend cut can send shivers down the spines of their investors. It really is one of the last things the Board will want to do as it signals belts being tightened and troubled times ahead.
Another thing is also probably going on here. Dividend hungry investors tend not to worry so much about short term fluctuations in underlying capital values as their focus is on income. If yields are maintained, investors really will not feel the pain of short-term market volatility. That’s not to say that they don’t want capital growth. However, this is a long-term expectation, with the shorter-term income focus reducing tensions around day to day market falls.
My conversations around this subject have been interesting and I accept the fact that for some people, the yield-seeking approach is so ingrained in their psyche that it’s hard to overcome. However, I do feel it has its shortcomings, especially at a time when we are starting to hear of dividend cuts from numerous large, UK institutions.
This income fixation is one that is predominantly embedded in the minds of UK investors. If you look at overseas shares, historically yield has not been important and it is only in the last decade that some overseas funds have looked to generate an income to fill a gap in the market. But even these struggle to pay much in the way of income.
Seeking yield also constrains diversification, with income seekers tending to find their portfolios skewed towards higher yielding areas of the stock market and predominantly invested in the UK. At Herbert Scott we believe its vitally important to invest our clients’ funds as broadly as possible, both across global markets as well as different sectors. This fundamental belief stems from research that proves diversification is a brilliant tool for reducing risk.
If you would like a further discussion around this subject, or are interested in hearing about alternative ways to generate a regular income stream from your invested capital, do please get in touch.
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Errors and omissions excepted.