Dividend Opportunity Strategy

Remember Dividends?

Twenty-five years ago dividends mattered. A quarter-century ago, the average stock dividend was around five percent. Since then, dividend yields have dropped continuously. 

What happened? For a variety of reasons, investors became less interested in dividends, and increasingly focused on capital gains only. Likewise, companies were less interested in paying dividends to shareholders, and found what they thought were better uses for their cash. Dividends were neglected and even derided by investors during the nineties. After all, with flashy non-dividend paying companies such as Amazon, Yahoo and eBay soaring in price, who needed small quarterly dividend checks?

In addition, investors paid ordinary income taxes on dividends, not the lower capital gains rate. So it's not surprising that the proportion of companies paying no dividend at all increased. The time-tested concept of "Total Return," appreciation plus dividends, fell out of favor with many investors.

We believe that there now exists an excellent opportunity to purchase the stocks of high-grade, well-managed companies with yields that are exceptionally high in today's interest rate environment.

The Strategy

Assets in each account are invested in equity stocks, up to thirty five different companies. The companies themselves are diversified throughout many industries, including utilities, pharmaceuticals, construction, consumer products, financials, automotive, telecommunications, chemicals, etc. The type of companies we select for this strategy would be considered stodgy by many go-go investors. We prefer to think of them as classics.

We buy solid, blue chip companies we think are undervalued, with a long and consistent history of paying dividends, and in many cases of continually increasing their dividends.

Total Return

 Many professionals call this approach a Total Return Strategy.  We manage the accounts for high dividends, moderate appreciation and lower volatility than the general market. In a flat or falling stock market, dividend-paying stocks usually have better total returns than those paying no dividends. In addition to the income they generate, high yielding stocks tend to have better price appreciation and shallower declines in such market conditions. 

Lower Taxes

With the recently changed federal tax laws, investors now pay only 15% on qualified dividends.  This was reduced from as high as 39%.  Qualified dividends are now taxed at the same 15% rate as are capital gains - a very attractive investment.
                                                                                            Dividends Mean Discipline

In recent years we have seen many companies fall under a cloud of accounting irregularities, corporate mismanagement and outright fraud. The discipline of having to pay regular cash dividends to shareholders is a hard taskmaster for businesses. Real cash flow and earnings are necessary to maintain and increase dividend payments. Since dividends are real cash, you can't fake them for very long. A dividend is the best evidence of a company's financial health. At a time when investors are skeptical of the revenue and earnings that corporations are reporting, regular dividends can give them confidence in the companies in which they invest.

Market Risk

There is always market risk. But, as we have read above, dividend paying companies tend to decline at a lesser rate that non-dividend paying companies in a market downturn. Usually that's because they are more conservative, disciplined companies, with management teams used to taking a lower risk approach toward business.
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The statements and opinions expressed in these articles are those of the author.   McIntyre, Freedman & Flynn Investment Advisers, Inc., cannot guarantee the accuracy or completeness of any statements or numerical data in these articles.

The discussion of the investments and investment strategy of  McIntyre, Freedman & Flynn Investment Advisers, Inc. (including Tom McIntyre's views of particular investments) represent the view of Mr. McIntyre at the date of each article, and are subject to change without notice.  

The investment return and principal value of an investment in McIntyre, Freedman & Flynn Investment Advisers, Inc. will fluctuate and on redemption may be worth more or less than an investor's cost.

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