ENB - Retirees Beware: Dividend Investing Is Overrated (Redux)

2023-11-27 13:04:02 ET

Summary

• Ordinary investors often make three common mistakes: thinking they can outperform the S&P500, trying to time the market, and over-emphasizing dividend income and yield.
• Many retired investors focus too much on dividend income stocks, or yield, resulting in lagging returns compared to the broad market averages.
• Retirees are particularly susceptible to over-emphasizing dividend income. They would be better off building a well-diversified portfolio centered on a low-cost S&P500 ETF with some growth stocks.

As we head toward the end of yet another year of unexpected twists-and-turns, it is important for investors to stay the course and keep focused on the long-term. With that in mind, and from my perspective as a 15-year contributor on Seeking Alpha, there are three primary mistakes the majority of ordinary investors make. First, they think they can outperform the S&P500 when research shows the vast majority of them do not (and even the majority of professional money managers don't either). Secondly, they think they can " time the market ". Research also shows they aren't so good at that either - after all, you have to be correct twice: when to get out, and when to get back in. The third common mistake is typically made by retired investors: over-emphasizing dividend income and/or yield. Today, I will focus on this last very common issue.

Investment Thesis

As I mentioned in my first article on this subject, on any given day the majority of articles on the Seeking Alpha "Trending Analysis" leader board will quite likely be about a dividend income stock, fund, or the latest high-yield "opportunity". Indeed, at pixel time 8 of the 12 "Trending Analysis" articles fit that description - and there are times that most all 12 do. That being the case, I was not surprised when my November 2020 article Retirees Beware: Dividend Investing Is Overrated was published and met with over 1,500 comments - most of them of a critical nature by those who have been convinced that a very rigid investment strategy focused only on yield is the best way to go.

Yet many of those readers apparently missed the point of the article. Indeed, regular followers who have read my portfolio management articles know that I advise them to allocate capital in a top-down fashion by constructing and maintaining a well-diversified portfolio - built on the foundation of a good low-cost S&P500 ETF - and to hold it through the market's up-and-down cycles. Certainly dividend income stocks are an important category within such an investment portfolio (see, for example, The Time To Worry About Tomorrow Is Today) .

However, it would appear that many investors are encouraged to greatly over-emphasize the importance of dividend income stocks and, as a result, end up lagging the returns that the market is otherwise more than willing to give them.

This especially appears to be the case with retirees who have been cajoled, persuaded, or otherwise convinced that simply because they are "retired" they should only invest for income/yield when the truth is that many of them could likely live very well simply on a combination of their social security, pensions, and investment income without adopting one relatively rigid investment strategy based on yield.

Indeed, the vast majority of high-yield income stocks will boost their taxes while doing very little to actually build generational wealth in my view. Some of these vehicles are simply "value traps" with slowly deteriorating business models while some of the high-yield "opportunities" have high yields for a reason - typically poor management or high debt-levels - such that the equity itself continues to fall such that the yield is "attractive".

Let's Take A Look

The motivation for my previous article on this subject was seeing the non-stop coverage on Seeking Alpha of income stocks like Exxon ( XOM ), AT&T ( T ), and Enbridge ( ENB ) throughout the last bull-market. I kept wondering: how do these articles - on some of the poorest returning stocks - end up on the Seeking Alpha leader board, day-after-day, and who is reading them? Unfortunately, I finally figured it out: it is retirees (like me).

As we know, those stocks were some of the worst investments during the bull-market (and arguably still are ...). After all, Exxon stock delivered a negative return over an entire decade (and finally got kicked out of the DJIA), AT&T stock has been on a downward trend for years, and Enbridge stock is 17% below where it was a decade ago (see Why Enbridge Is Overrated ):

As can be seen by the graphic above, and not surprisingly (at least not to me), these three income and/or "yield" investments have been a disaster for investors as compared to the broad market indexes as represented by the Vanguard S&P 500 ETF ( VOO ), the Invesco Nasdaq-100 Trust ( QQQ ), and the SPDR Dow Jones Industrial Average ETF ( DIA ). I should know, for various reasons I own both Exxon and Enbridge, and they have typically been at the bottom of my investment returns spreadsheet for many years now.

But let's broaden the comparison out a bit and compare the total returns of the broad market indexes with some of the more popular funds that are focused on investment income such as the Schwab U.S. Dividend Equity ETF ( SCHD ), the Vanguard Dividend Appreciation ETF ( VIG ), the iShares Core Dividend Growth ETF ( DGRO ), and the Vanguard High Dividend Yield ETF ( VYM ):

As can be seen from the chart, some of these income/yield plays have posted solid returns, yet none have achieved the total returns of simply holding the S&P500 let alone the Nasdaq-100.

Going a step further, let's look at the total returns over the past decade of some of the leading growth stocks and ETFs that pay little or no dividend whatsoever:

As can be seen in the graphic, Amazon ( AMZN ), Google ( GOOG ), Nvidia ( NVDA ), Tesla ( TSLA ), the Fidelity MSCI IT Index ( FTEC ), and the VanEck Semiconductor ETF ( SMH ) have all out-performed the broad market averages (even the triple Q's) let alone the dividend/yield picks mentioned earlier.

Summary & Conclusions

For retirees, the conclusion is pretty simple here: unless you have a dire need to generate income every month just to "get by", you would be much better off shunning the plethora of investment advice to adopt a rigid investment strategy centered on "income" or "yield" and simply going with what has been proven to be a superior investment strategy: building and holding a well-diversified portfolio, centered on a good low-cost S&P500 ETF (like VOO), that does include a "dividend income" category, but which also has in it broad market ETFs like QQQ and DIA as well as a healthy allocation to a "growth" category which should be heavily biased toward technology stocks. After all, technology will be the growth engine of the 21st Century. And if you are stuck in "value" stocks and don't have a significant allocation of capital to the technology sector, I believe you will lag the returns of the broad market averages.

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