As a dedicated advocate of investing for income, I decided to explore the reasons why people ignore my advice and put their retirement and savings portfolio at the mercy of the stock market's unpredictable ups and downs.
Reason #1 -- You're Still in Your Twenties or Thirties
You're young, you have thirty, forty or maybe fifty more years to work and save up a gigantic retirement account balance. You know that, historically -- in the long run -- the stock market has created far more wealth than gold, cash, and bonds.
So you're not concerned about current problems, the looming debt crisis, the impending fall of the U.S. dollar or the retirement of the baby boomers (who you assume will all be dead by the time you call it quits). Therefore, you want growth from the stocks in your portfolio -- and lots of it. Fort those old school dividend-paying companies.
In many ways, this is a healthy attitude.
However, it ignores a few facts. First off, the famous chart Dr. Jeremy Siegel published in his book STOCKS FOR THE LONG RUN assumes the reinvesting of stock dividends. It is NOT -- and was never intended to be by Dr. Siegel -- a reflection of how much "growth" stocks grow. In his later book THE FUTURE FOR INVESTORS Dr. Siegel estimates that 97% of that stock growth curve came from the reinvestment of dividends, and only 3% from the increase in market share prices. If your portfolio or mutual fund pays no dividends, you can't reinvest them.
What's more, historically, stocks that pay dividends actually go up in market price more than do growth stocks -- with the short-term exception of the peaks of market bubbles such as 1998-99.
Reason #2 -- Stock Dividends and Bond Interest Are Too Small
I wish this were a simple error, but the truth is that both stock dividend yields and bond interest rates are, historically, very low. There's no getting around that.
However, stock dividends tend to rise over time. They are the best way of keeping the spending power of the income of your portfolio up or ahead of the rate of inflation. Also, there are classes of stocks that pay higher amounts than most stocks. One of them has average annual dividend growth of 7%.
Plus, there's the simple truth behind growth stocks . . . to profit from having bought them, you must sell them. And then you no longer own them.
With a portfolio generating investment income, you're receiving a return whether the market price is up or down -- without ever selling off one share.
Reason #3 -- All the Experts Say I Should Invest in An Index Fund
I agree that investing in an index fund is the best way to reduce your risk of lower prices. However, to me that just means index investing is optimizing a dysfunctional strategy.
The last time I checked a few months ago, the S&P 500 total dividend yield was only 1.6%. That may be your only return for years to come -- as it has been for stock index funds since the spring of 1999 (as I write in July 2010).
Doesn't it make more sense to maximize your dividend income, while using diversification to protect yourself from the risk of buying individual securities? (I agree you shouldn't buy single companies if you can avoid it).
Sorry, but the more I think about it, the more I believe the only valid reason to avoid investing for income is if you have a 100% guaranteed crystal ball that predicts the future. I don't have of those. Do you?
Author Resource:
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