Dividend investing in 2023

[archer]

I'm wondering if Dividend stocks and their funds such as SCHD, JEPI, and others will suffer some headwinds with the current higher yielding safer investments. 

Forgive me if my data is off, but I believe treasuries are now yielding around 4%, as are MM funds. Of course you don't get the total return with those, but, to the extent investors move their money (some of it at least) to safer investments that are now yielding more, I suspect this will take away from the demand for div stocks and associated funds. Lower demand = lower prices.

Another possible headwind would be as rates stabilize, investors might start moving more aggressively back into growth. 

Any thougths?

[Deleted]

archer,

In response to your question, I say "who knows?" Any surmising on the short term is just that. I think you have to look at real returns - factor in inflation. In the long run, equities tend to keep up with inflation, bonds do not. In a 0% interest rate world, 4% risk free looks competitive. But that is not our world. I have 30 or so years left on this earth - god willing, so I will continue to go out on the risk spectrum with dividend stocks, being mainly concerned if the dividend is in danger.

I think your point about growth is valid and the reason I have growth stocks as well. If the discount rate goes down, they are going up. Period. At the end of the day, you can't get away from risk, reward, discount rates and what lets you sleep well at night. For me - I sleep pretty well. I have a large tilt to dividend stocks and don't see that changing from year to year. I have a decent allocation to growth stocks and don't see that changing either. I don't know if next year will br crazier than last, but I made it through!

I think there are probably many who think like me - i.e. they have a dividend strategy and are not inclined to switch in and out. If we have a deep recession and dividend cuts start - that is where I see investors backing out of them. 4% yield with inflation exceeding that, or even a percent below is not going to make me switch from something with a dividend growth rate that keeps up with inflation.

[archer]

@slooow,Your perspective seems pretty sound to me. Thanks and happy New Year!

[bizman]

Dec 31, 2022 22:48:57 GMT archer said:

I'm wondering if Dividend stocks and their funds such as SCHD, JEPI, and others will suffer some headwinds with the current higher yielding safer investments. 

Forgive me if my data is off, but I believe treasuries are now yielding around 4%, as are MM funds. Of course you don't get the total return with those, but, to the extent investors move their money (some of it at least) to safer investments that are now yielding more, I suspect this will take away from the demand for div stocks and associated funds. Lower demand = lower prices.

Another possible headwind would be as rates stabilize, investors might start moving more aggressively back into growth. 

Any thougths?

One certainly never knows anything about the future with certainty.  But I think SCHD has a few things going for it versus SPY, for example.  Using M* data, SCHD trades at a forward PE of 13.66 and SPY trades at a forward PE of 17.87.  By that math, SCHD trades at a 23.5% discount to the S&P.  

SPY's current yield based on its TTM dividends is 1.65%.  SCHD's current yield based on its TTM dividends is 3.39%.

SPY's dividends grew 10.5% YOY.  SCHD's dividends grew 13.8% YOY.

SPY's trailing 1, 3, 5, and 10 year annual total returns are -18.2, +7.6, +9.3, and +12.5%.

SCHD's trailing 1, 3, 5, and 10 year annual total returns are -3.2, +13.1, +11.7, and +13.7%.

SPY is much more heavily weighted in the big FANGAM growth stocks, so a higher for longer interest rate environment would likely be worse for it than SCHD, at least all else equal.

Looking at total returns over the last 10 years, most of that time has not been ideal for "cheap" dividend stocks, as a great bull market puffed up the valuations and weightings of the high growth tech stocks in SPY.  And yet SCHD is ahead by 1.2% a year over SPY.

Certainly nothing is dispositive about the future, and different styles can go in and out of favor.  But I see nothing in particular negative in the above vis-a-vis SCHD unless you are going to posit reversion to the mean.  Which certainly can happen.  In fact maybe we should plan on it.  But I'm not in it for the next 6 months or a year.  I think it has a good shot to be a good long term performer going forward.  What will be the best?  I have no idea as I have no functioning crystal ball.

I am rather heavily in cash though.  Some capitulatory downside would be welcome to finally put some of it to work.  But it has been a frustrating market in that regard in 2022.  Best wishes to all in the New Year.

 

[chang]

@slooow Well said.

[FD1000]

According to my system, lately+current conditions always tell me what to do.
SCHD+HDV (energy tilted) are better than SPY for 1-3-12 months, see one month (chart), and change to 3+12 months.
Easy call for me what to do.

I can come up with reasons why? but I don't need to, because the charts are always right.

BTW, in the past, growth beat value,SC and EM over 10 years, but I kept reading explanation for years why value, SC and EM are going to do better based on...reasons.

SCHD: I have posted over 5 years now, that this fund has done well in growth+value conditions + had yield>3%.
HDV is energy tilted and why it's doing well too in 2022.
It depends on your style what to do. You are more of a LT investors you can go with 50/50 SPY(tech tilted)+SCHD. If you are OK with trading then hold only SCHD+HDV.
If you are between, you can use 40/40/20 SPY/SCHD/HDV.

[archer]

FD1000, I too mostly go by the trends. IF things change with the trend, I do like to know why for a bit of confirmation. Kind of like 2022 for the market as a whole. Early 2022 the market starts declining. In light of the big picture, it made sense with the war, and then with the Fed. Otherwise, it could just be a temporary dip just waiting to whipsaw me. Admittedly, this is just to make up for my often not being able to get a clear reading from charts with a high success rate. SO, perhaps my OP ideas will give some clarity if and when the trend changes or looks tenuous.

[FD1000]

OK Archer, you asked? I will comply.

Value should be better, because value pays more and competes better with bonds who pay higher rates.
FD: not true of course.  Bonds paid a lot higher in 1995-1997 and growth made more than value.

Higher yield should do better, regardless. If you believe in higher yield(not true again), you would say, I told so, and then miss years of growth, SC, international doing better.

Energy should do better.  War, Putin, Biden against drilling are good reasons. That may work or not.  Energy was great for years and then was terrible for years too.

The best tech should work.  The market can't go further without them. Well, HDV did pretty well without the big tech. Apple the biggest/best company in the world is trailing SPY+HDV by a 14% and 20% in just 3 months (chart).

You should buy the index and go to sleep. That worked well in 1995-2000 and 2010-2021.  But that was terrible in 2000-2010 when the SP500 lost money in 10 years. It was terrible in 2022 with 18% loss.

If an analyst has 5 degrees and 2 PhD, he/she must know more. Wrong, after someone knows the basics, there is no need for more degrees.

Anyone who is always a bull and especially a bear, you should avoid. 

The longer someone explains his/her position, the more I know it's BS.

So after I realized the above, I came to the following conclusion in 2000.  Only markets know where to invest
Example: Until 2022 I never invested in commodities or directly/mostly in Chinese bonds, but I traded both in 2022 using Vanguard Commodity Strategy + MAINX.

Lastly, I learned it from one of the best, Bob Dylan, "You don't need a weather man to know which way the wind blows".

I hope my list gave you the best "real" reasons.

[acksurf]

I won't be moving $ from SCHD et al to Treasuries/CDs but I probably won't be as quick to move cash into dividend stocks either. It's remarkable that MM went from 0 to 4.26 so quickly. I have several CDs/Treasuries at 4.5%+. Currently they'll mature from March through June. I may roll them if the equity environment is still uncertain. However, this is all in taxable accounts. My tax advantaged accounts are creeping up to 90% equity (mostly cash in the balance).

[hondo]

Good post Sara.

[win1177]

Dec 31, 2022 22:48:57 GMT archer said:

I'm wondering if Dividend stocks and their funds such as SCHD, JEPI, and others will suffer some headwinds with the current higher yielding safer investments. 

Forgive me if my data is off, but I believe treasuries are now yielding around 4%, as are MM funds. Of course you don't get the total return with those, but, to the extent investors move their money (some of it at least) to safer investments that are now yielding more, I suspect this will take away from the demand for div stocks and associated funds. Lower demand = lower prices.

Another possible headwind would be as rates stabilize, investors might start moving more aggressively back into growth. 

Any thougths?

Who knows what “headwinds” stocks will suffer this year!!! I am a dedicated “dividend growth investor”, and that is where I will continue to put MOST of my investment money. Traditionally, dividend stocks have tended to do well over the long term in inflationary situations, as companies can raise prices to compensate for increased labor costs, material/ manufacturing costs, transportation costs, etc. Companies that have “wide moats” (patents, unique products, high returns on capital, ability to fight competitors, etc.) typically pay rising dividends, which have kept up/ beaten inflation over time. That is why I try to stick with wide moat dividend growers, and have held most of my positions for years. I did make forays into “growth stocks” last year (with mediocre results), mainly trying to pick up some positions I had long wanted (AMZN, more GOOGL, etc.).

But the majority of my positions are in wide moat dividend growers, which will continue to raise their dividends. So far, most of them have given me “decent” dividend raises, maybe not as high as inflation, but MUCH better than bonds/ bond funds! There are a few I am “watching”, having disappointed me over the past 1-2 years, but most are doing fine. 

I will add to bonds his year, mainly for some diversification and the steady income, but the lions share will continue to go towards dividend growth stocks/ funds. Bye the way, agree 100% with Sara’s post!

Win

[FD1000]

Jan 1, 2023 2:09:51 GMT @slooow said:

archer ,

In response to your question, I say "who knows?" Any surmising on the short term is just that. I think you have to look at real returns - factor in inflation. In the long run, equities tend to keep up with inflation, bonds do not. In a 0% interest rate world, 4% risk free looks competitive. But that is not our world. I have 30 or so years left on this earth - god willing, so I will continue to go out on the risk spectrum with dividend stocks, being mainly concerned if the dividend is in danger.

I think your point about growth is valid and the reason I have growth stocks as well. If the discount rate goes down, they are going up. Period. At the end of the day, you can't get away from risk, reward, discount rates and what lets you sleep well at night. For me - I sleep pretty well. I have a large tilt to dividend stocks and don't see that changing from year to year. I have a decent allocation to growth stocks and don't see that changing either. I don't know if next year will br crazier than last, but I made it through!

I think there are probably many who think like me - i.e. they have a dividend strategy and are not inclined to switch in and out. If we have a deep recession and dividend cuts start - that is where I see investors backing out of them. 4% yield with inflation exceeding that, or even a percent below is not going to make me switch from something with a dividend growth rate that keeps up with inflation.

I have done it in the last several years, good performance with extremely low risk/SD.

But, there are funds/managers that have done it for years and sometimes decades. The funds below had better risk-adjusted performance during their glory. I have used extensively all the funds below, except VWINX. I owned VWINX in most accounts for my wife for many years at a very small %, if I'm gone. 
PRWCX and VWINX over decades.  See PRWCX vs VFINX(SP500) since 2000 PV(link). SP500 had 50% more volatility and made 4% less annually.
PIMIX over 7-8 years. 
SGIIX,OAKBX,FAIRX over 8-10 years. 

These funds have done it without trading in/out, just holding.  If one never looks for them, one never uses them.

The link above =www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2000&firstMonth=1&endYear=2023&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=PRWCX&allocation1_1=100&symbol2=VFINX&allocation2_2=100

[steelpony10]

archer ,

       If you believe most posters to be spend down investors on here, do you think most posters also believe future market movements are and will always be unknown and no amount of maneuvering will ever consistently solve an unknown long term?

[Deleted]

steelpony10,

"If you believe most posters to be spend down investors on here, do you think most posters also believe future market movements are and will always be unknown and no amount of maneuvering will ever consistently solve an unknown long term?"

I looked up spend down investor to make sure I understood what you were talking about. From what I can best tell, it is just the way a retiree takes withdrawals from what he has accumlated. So, I guess I will be one as primarily a dividend investor.

I would think that everything in the future is unknown and that's why we have statistics. I could die tomorrow, but chances are pretty good I won't. I could also outlive my accumulation, but statistics say that is unlikely. If I invest heavily in one area - say mortgage backed securities, crypto or NFTs, that might work or not. There might be things lurking in these I have no idea about. If I get burned, I turn to ashes. If I invest broadly in the US and world economy, I feel pretty comfortable, the statistics will bear out in the long term, and if tail risk comes in to play, the whole world will be in ashes.

It would seem to me any investment vehicle has risk. I do think that it has been shown that certain investing paths are very likely to solve an unknown long term, so feel I am not quite understanding what you are saying?

[archer]

Jan 5, 2023 12:16:44 GMT steelpony10 said:

archer ,

       If you believe most posters to be spend down investors on here, do you think most posters also believe future market movements are and will always be unknown and no amount of maneuvering will ever consistently solve an unknown long term?

I do believe most investors here are in their spend down or harvesting phase. As for the unknown, I believe most of us know there is always an element of unknown for the market in that thing can always change, but there is also if you could mix all our brains into one, there is a good understanding of how the markets work. We have business cycles, predictable response to interest rates, correlation etc. So I think most of us invest based on what we know about the markets. Even diversified B&H investors are basing their approach on what they believe to be true.

I do agree that most of us believe we can't consistently solve the unknown, and so we work with what we know or at least think we know.

[FD1000]

Jan 5, 2023 19:54:48 GMT steelpony10 said:

archer ,

         I gave up on markets 20+ years ago as not predictable or dependable as seen over and over. So one set up is as good as another. You can never know when you may be making things worse dealing with an unknown. That was the thought I wanted to add.

          My opinion would be to fix a problem when something no longer meets your needs instead. Forget short term market movements. If you don’t like how you’re stuck in the mud now don’t just tinker around look for a permanent fix you can live with that maintains your lifestyle during these types of market conditions. Everything is on sale. Maybe more cash flow or reserves. Present equity options yield below the general inflation rate not necessarily your personal rate but you would be able to slow the erosion of your purchasing power. Higher yields would be better if that fits your risk parameters.

@slooow ,

           Well something along those lines I guess. So regardless of studies, allocations, buckets, diversification, rules, schemes, systems and trading this is just statistically a lower possibility which I saw in 1968-1982, 1999-201O and 2020 maybe-?. That was about half of my investing life so these types of markets seem more likely at times to me. I thought I should have a plan for that. I don’t see how any of that other stuff addresses that goal because of the increased market dependence. 

            I’m talking about maintaining the lifestyle I had when I worked, replacing household income with SS and a dependable paycheck like cash flow with a set aside for future unknown needs and/or high inflation which I experienced at times. Keeping a job was more risky to me where my income could go to zero. Value fluctuations just don’t seem as critical because I expect them to happen and I eliminated dependence on markets as much as I could. Speaking of risk, I’ve had 2 distribution cuts already down to 12%+ along with values which isn’t to shabby in my opinion since it was “free” money at this point from now on.

My permanent FIX was to adapt to the constant change, instead of staying the course, no matter what. 
It's not difficult to run a screener and find wide range leading categories, instead of being diversified at all time.
Why someone invest in 2010-2021 in value, SC, international when LC tilting growth has been great for 11 years?  Before that, during 2000-2010, it was the opposite.
I didn't invent it, I learned it from Buffett in 2000 "diversification is protection...."

Distributions are never free. Free money is having better risk-adjusted performance (example: PRWCX vs SP500 since 2000). If a typical CEFs lose 10%, it means your portfolio is now worth only 90% INCLUDING all the distributions. 2022 was a great example of that.

MM pays very small dist in 2022. Which was a better choice, PDI who pay 12% dist and lost about 17% or MM? Easy answer see below.

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