By: Jeff Bullock
In Star Wars: Return of the Jedi, one of the great scenes, and oft quoted lines in pop culture occurs when General Ackbar, the Rebel commander, is leading his fleet into battle against The Empire. Shortly into the attack he realizes they miscalculated one aspect of their plan and have unknowingly fallen right into the hands of their foe. It’s at this moment that General Ackbar exclaims, “It’s a trap!”
Many traps exist when you set out to invest your money. One trap, in particular, can be found when choosing an equity dividend strategy. Many investors who want income, while still maintaining equity exposure, turn to dividend strategies to fill this need.
As an investor, we believe you need to be careful, however, to find the right dividend strategy because many of these that look appealing on the surface, may actually have subtle traps under the hood. Below are three approaches to be aware of:
- High Dividend Yield but Low Dividend Growth: This approach is the biggest “gotcha”. They look great on the surface with a high dividend yield, but the underlying companies generally have a poor history of growing their dividend at any substantial growth rate. A strategy like this feels good at the outset, but often disappoints over the long run.
- Average Dividend Yield and Average Dividend Growth: To use a worn-down cliché, these strategies are a dime-a-dozen. An approach like this will bundle together a bunch of average dividend-paying companies that have an average dividend growth history. The results for the asset class are usually, average.
- Above Average Dividend Yield and Above Average Dividend Growth: Welcome to the land of dividend unicorns. These are the highly disciplined strategies that focus on cash-heavy, low debt companies, who have a long history of not only paying dividends (think decades), but also increasing those dividends every year. There is no instant gratification with these strategies, but years down the road they pay off due to their high dividend growth rate. This is where you want to be.
In the epic words of General Ackbar, “It’s a [dividend] trap”! Not all dividend strategies are created equal, but finding the right one, can make all difference years down the road.
This blog is general communication being provided for informational purposes only. This information is in no way a solicitation or offer to sell securities or investment advisory services. It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy. This does not contain sufficient information to support an investment decision. Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest. Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved. No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Fidelis Wealth Advisors, LLC. Fidelis Wealth Advisors does not provide legal or tax advice. Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.