Dividends, dividends, dividends … You can’t watch CNBC without seeing another expert pitching another high-yielding dividend stock. From a personal point of view, I’m as guilty as the next investor and have built up my own meaningful dividend portfolio.
We live in strange times. Where retirees are forced to chase yield (and risk) to supplement their pensions. Where governments punish savers with low rates to the benefit of debtors. My only consolation to lower rates is that the government will get lower tax from my lower interest income.
I was fortunate to have escaped the financial crisis unscathed. Moreover, I knew with low interest rates that it made sense to buy dividend stocks. Still, I get no pleasure now from watching my dividend portfolio rise in value. That’s because with interest rates down to all-time lows, and escalating fears of a Japan-style future, I’m wishing I had bought more.
But chasing yield is not without its risks. Stocks have risen a lot since the crisis bottom. The catchphrase on CNBC is to keep buying dividend stocks because their yields are higher than government bonds. That’s a red herring in my view. The only reason bond rates are at emergency lows is because of the dire state of the patient. If that patient gets better, rates go up, which could have an adverse effect on share prices, particularly for leveraged dividend plays. If the patient stays the same, rates might stay low and dividend stocks might still be a good buy. And if the patient gets worse — can we be certain that dividends won’t be cut or that share prices will hold up on the back of yield alone?
It’s a tough call.
In March, I wrote: Don’t shoot for the stars. The main message being: investors should avoid targeting returns that are too high, otherwise they risk taking more risk than they can handle. It’s why I won’t sell my dividend portfolio even as prices rise exponentially. It’s also how I resist from buying (too much) more — (I’m not perfect).
For retirees who live off their investment income, it can be hard to resist chasing yield. These individuals would do well to carefully consider all the risks and ask themselves if they can better afford to tighten their belts now, or risk being forced to tighten them later.
