The Dividend-Fund Dilemma

For a balanced investor having the right asset allocation is key.  Jason Zweig in his weekly WSJ article points out the rush into dividend paying stocks and funds as people seek better returns than bonds as savers continue to get punished in this low rate environment people.  At the end of the day it is about knowing what you are invested in and why.  The is no guarantee that a stock that pays a dividend will return your capital at the end of the day like a bond will when it matures.


As Zweig's piece paints a broad stroke of how dividend payers perform in the crisis not all dividend paying stock are equal.  While your objective may be to focus on dividend paying stocks, you still have to do the analysis to determine if the company is worth pursuing.  Buying a stock just because it pays a high dividend should not be an investing strategy.


We own several dividend paying stock in the DWCM fund because we believe they are solid investments and fit our investment strategy not solely because they pay a dividend.  See our most recent weekly performance here which includes our dividend paying stocks that we own. 


From the WSJ here

• In the fourth quarter of 2008, the S&P 500 fell 21.9%; dividend-oriented mutual funds lost 20.2%, according to investment researcher Morningstar. In other words, the average dividend fund fell nearly as much as the overall stock market. Bonds, meanwhile, performed beautifully: Over the same period, the Barclays Capital U.S. Treasury index returned 8.75%.
• And from the stock market's peak in the fourth quarter of 2007 through its bottom in the first quarter of 2009, the Dow Jones U.S. Select Dividend index lost 53.8%, versus a 50.2% loss for the S&P 500, according to Fran Kinniry, an investment strategist at Vanguard Group.
• In the long run, dividend-paying stocks are slightly less risky—and more rewarding—than the equity market as a whole. In the short run, however, they can expose you to the risk of being in the wrong place at the wrong time.
• Another point: Since 2003, dividends have generally been taxed at just 15%, much lower than most bonds, whose interest payments are taxed at ordinary-income rates. Unless Congress and the White House take action, the dividend rate will leap to 43.4% next year for investors in the top federal tax bracket—the same rate that would apply to most bonds. You can avoid this problem in a tax-sheltered 401(k) or individual retirement account.
• The right reason to own one of these funds, says Daniel Peris, author of "The Strategic Dividend Investor" and co-manager of the Federated Strategic Value Dividend fund, is that stocks with growing cash distributions tend to be solid businesses that earn greater returns in the long run than stocks as a whole.