When you’re down and out

When you’re on the street

When evening falls so hard

I will comfort you 

I’ll take your part, oh, when darkness comes

And pain is all around

Like a bridge over troubled water

I will lay me down.

1971 Grammy Album and Song of the Year, and nearly forty years later I still love that track, which is neither here nor there!

When markets are soaring, and hard charging growth stocks rule the day, dividend stocks tend to be overlooked, often derided as “old people’s investments” producing more slumber than returns. To an investor, a good night’s sleep is important, so there may be a seed of truth in there. Only a seed. But when pain is all around, and bubbles are bursting, the dependable dividend stock emerges as your bridge to relative safety.

What is a Dividend?

A dividend is a share of corporate earnings a corporation pays out to shareholders in the form of additional stock shares or cash.  

Large, well-known companies with a long history of profits and consistent earnings like to issue stock dividends and cash dividends to maximize shareholder wealth. Cash dividends are the most common and generally what shareholders want, especially if they are retired and depend on the income from their portfolio.

Dividends are declared by a company’s board of directors, and approved by shareholder vote before they can be paid out. Mutual funds, exchange traded funds, and real estate investment trusts also pay cash dividends.

What is Dividend Yield?

An investment’s total return is the combination of the growth of the asset’s market value and any income it provides. Income yield is a critical component of an investment’s total return. 

Yield is expressed as a percentage, determined by dividing the stock’s cash dividend amount per share by the share price. For instance, a $50 stock with a $2.00 cash dividend yields 4% ($2.00 / $50 = 4%). To investors requiring spendable income, yield is generally the most important component of total return, growth being a secondary consideration.

Where do I find attractive yields?

Those hard charging growth stocks are all about price movement, hopefully upward. Tech companies, bio-tech, online retailers and new economy themes can be appealing growth generators and sought after by investors who don’t require spendable yield and are willing to take higher portfolio risk for potentially higher returns in the form of share price increases in their growth stock. 

Growth stocks are equities in companies still in growth phase.

Revenue tends to go back into the company to build more locations, expand their technology, increase R&D spending, hire more people, buy more advertising and so forth. They are not mature value companies because they have yet to peak, and use all available cash flow to keep growing the company.

But value companies, past their growth phase, don’t put nearly as much back into the company as growth companies do.

They pay cash dividends instead. Investors who require less portfolio volatility and higher levels of income, the definition of a retired investor, look for dividend yield from diverse industries including energy, utilities, financials, healthcare and big pharma.

Are Dividends a superficial ideal?

Some researchers have opined that dividends are irrelevant, and investors shouldn’t be concerned with dividends. If they want income they can simply sell shares to create income, right? No. When the rest of the market is nose diving faster than Lindsay Lohan’s career, do you think seniors should be lining up to dump stock at the worst possible time? Does that sound like solid financial advice to you?

These academics are brilliant, but they are sequestered in their ivy-framed research fortresses, never having to provide comforting counsel to retired, income-starved retirees.

Dividends are unique in their purpose.

While the cash itself serves to support or supplement a retired investor’s cash flow needs, dividends also serve an important psychological and emotional purpose. It is comforting to know when markets go south, you can count on the dividend checks to appear in the mailbox. Again. And again. Truly the bridge over troubled water.

These payments are reassurance that the company is managing their affairs well in turbulent times, exhibiting strong corporate governance, and rewarding their loyal shareholders with a good night’s sleep.


These academics are brilliant, but they are sequestered in their ivy-framed research fortresses, never having to provide comforting counsel to retired, income-starved retirees.


The Dividend Aristocracy

There are companies that have paid dividends so long and so consistently that they are called Dividend Aristocrats.

As of this writing, it is a choice group of fifty-seven S&P 500 stocks with twenty-five years or more of consecutive dividend increases, and as a group they have a long history of outperforming the market. They are “Best in Class.” (PDF ARISTOCRATS 2019 09 17 – Sheet1)

Investors who are research-minded may wish to cherry pick the list which includes AFLAC to Walmart, but for fans of simple, efficient and cheap ways to invest, (i.e, Passive Make) ProShares S&P 500 Dividend Aristocrats® ETF (NOBL) is the only ETF that focuses on this rare breed of companies.

From ProShares site: 

NOBL‘s holdings are the S&P 500 Dividend Aristocrats, companies that have not just paid dividends but grown them for at least 25 consecutive years, with most doing so for 40 years or more, exhibit stable earnings, solid fundamentals, and often strong histories of profit and growth.

NOBL‘s strategy has allowed investors to capture most of the gains of rising markets—while managing risk by potentially limiting losses in falling markets. In addition, the strategy has had strong performance with lower volatility than the S&P 500—providing a smoother ride over the long term. 

The Importance of Asset Location

For dividend-paying equities (stock or ETF) held outside of tax-qualified retirement accounts, dividend payments are taxable as ordinary income, not preferential long-term capital gains.

But for savvy investors who plan ahead, holding dividend-paying securities in ROTH IRA or ROTH 401k accounts will have effectively converted taxable income to tax free income!

Go here to read more about Asset Location. The Hidden Return

Due Diligence

Because your stock pays a dividend does not mean it will always pay that amount or declare a dividend at all. Even companies with a long established history of dividend payments can get into financial trouble or simply need the cash to support other company objectives to maximize shareholder value, and reduce or eliminate dividends. It happens, which makes the risk-reducing aristocrat model so appealing for safety minded investors.

Upcoming article posts will focus on other issues regarding dividend stocks, like important dates that affect the timing of purchase decisions, and how to create rising streams of income, which are your bridge over troubled water. Stay tuned!