Focus on Quality,
Not Higher Yields
Brian Youngberg, CFA • Senior Equity Analyst
When focusing on dividend-paying stocks for income and rising income, we believe you should
avoid searching for the highest-yielding names. Instead, look for higher-quality stocks with the
potential to grow their dividends over time. Higher yield is usually associated with higher risk,
and these stocks may fall short of expectations due to dividend cuts, lower growth in earnings
and dividends, or negative effects from rising long-term interest rates.
Many investors wisely look at dividend-paying stocks as a complementary
income-producing vehicle to other asset classes, such as fixed-income
investments. However, in their search for additional income, some investors
are focusing on the highest-yielding stocks, which we believe carry additional income-reducing risks. They have also tended to underperform the
market despite having very high dividend yields. We recommend owning
higher-quality, dividend-paying stocks that have the potential to grow their
dividends over time.
High-yield Stocks Typically Carry Higher Risk
What Is Yield?
High yields can be the market’s signal that investors have concerns. If the
market is pricing a stock at a level where the yield is so high, it may be
signaling one or more of the following:
The dollar amount of
• The dividend is increasingly at risk and could be cut, potentially sooner
rather than later.
dividends paid in a year
• The dividend may not increase over time.
relative to the share price.
• Growth prospects or business fundamentals at the company have
deteriorated, and future dividend increases are unlikely.
The dividend yield is
expressed as a percentage.
• With certain types of investments (such as master limited partnerships),
some of the income ends up reducing your cost basis and may potentially
result in having to pay more taxes when you sell the stock. As a result, the
level of income is not quite what it appears to be.
The Effect of Rising Rates
If the U.S. economy continues to recover and the Federal Reserve gradually
tightens monetary policy, the resulting rise in long-term interest rates would
likely have a larger negative effect on higher-yielding stocks. History is full of
examples of higher-yielding stocks experiencing sharp downturns in share
prices when long-term rates rise quickly.
PAGE 1 OF 2 RES-5836C-A EXP 28 FEB 2018 © 2017 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.
Rising Income and Total Return Matter
It’s important to focus on your total return from owning stocks and the
potential for consistently rising income, not just the current dividend income.
Total return includes share price appreciation and dividend income over
time. In addition, a primary reason for owning dividend-paying stocks is
the opportunity for rising income, whether reinvested or used to pay for
everyday living. If the dividend is not growing, then an investor’s inflationadjusted income from the stock actually declines.
Higher-quality companies that grow their dividends over time can provide a
rising stream of current income that helps offset inflation. Historically, these
stocks have delivered a higher total return for investors, as illustrated in the
chart below.
Returns of S&P 500 by Dividend Policy
Growth of $10,000 since 1972
$800,000
$706,900
$600,000
9.9%
Annual
Return
$400,000
$200,000
$250,000
7.4%
$0
Dividend
Growers &
Initiators
Dividend
Payers with
No Growth
$29,900
2.5%
$4,900
-1.5%
Non-Dividend
Payers
Highest
Yields
Source: Ned Davis Research, 12/31/1971 - 12/31/2016. Uses indicated annual dividends on a rolling
12-month basis. Highest yields = Top 20%. Past performance may not be an indication of future
results. The S&P 500 is an unmanaged index and is not meant to depict an actual investment. Does
not include transaction costs or taxes. Dividends can be increased, decreased or eliminated at any
point without notice. Further distribution prohibited without prior permission. Copyright 2016 (c)
Ned Davis Research, Inc. All rights reserved.
Company
bol
and Sym
Utilities
(D)
Resources
Dominion
AGE
LIST AVER
$0.96
$118.44
$74.94
$64.65
$76.28
$2.64
2.4%
2.7%
2.2%
2.4%
4.0%
3.2%
$3.15
$1.68
$1.56
$3.02
Price
nt
Moveme
end
L-T Dividth
Grow
Estimate
Div.
% Last
Increase
21
1936
1992
2003
2003
1927
12
12
9%
14
Below
10%
5%
8%
8%
6%
Avg.
Average
Avg.
Below
4%
5%
24
Avg.
Below
5%
3%
Avg.
Below
6%
4%
1
1899
Avg.
Below
5%
1%
60
1947
$1.92
3.2%
$109.67
8
1901
$1.28
3.3%
6
1935
$1.88
4.0%
$58.66
$29.70
of Div.
Years
Increases
$3.20
3.0%
$31.73
Below
7%
2%
11%
7%
Avg.
Average
6%
7%
54
1944
Avg.
Below
6%
NA
7
1999
$3.10
2.8%
$113.25
$61.99
1864
$1.12
5.0%
Avg.
Average
11%
10%
6
Avg.
Below
6%
10%
22
1952
$1.77
2.1%
$52.65
$61.67
Care
Health
on (JNJ)
& Johns
Johnson
(MRK)
Merck
)
Pfizer (PFE
Industrials
)
Materials
son (EMR
Emer
Materials
ric (GE)
rials
ral Elect
Mate
Generials
(UTX)
Mate Technologies
d
Unite
Materials
Materials
Materials
Materials
ir (PX)
Mate
Praxarials
y
Technolog
(ADI)
Devices
Analog
(MSFT)
Microsoft
$2.68
4.2%
$42.60
Energy
(ENB)
Enbridge
Services
Financial
)
orp (USB
U.S. Banc
(VTR)
Ventas
Dividendse
Paid Sinc
Yield
$87.60
Avg.
Below
6%
1%
60
Below
12%
7%
44
Avg.
Below
9%
10%
5%
14%
44
1890
Avg.
Below
7%
6%
6
1952
$3.01
2.9%
1
3.1%
40
1941
$1.68
3.3%
$103.78
1986
$2.20
2.6%
$51.48
1976
$3.76
3.1%
$122.57
$85.65
Below
3%
2%
9
1984
$2.31
4.7%
$49.01
Services
cation
(VZ)
Communi
unications
Comm
Verizon
ary
Discretion
Consumer
(MCD)
McDonald's
(OMC)
Group
Omnicom
(VFC)
VF Corp.
Staples
Consumer
(PEP)
PepsiCo
le (PG)
& Gamb
Procter
Annual
Dividend
of
Price as
2017
Jan. 31,
Check Out the Equity Income Buy List
8%
8%
8%
7%
Avg.
Average
Avg.
Below
Below
Avg.
A good place to start when looking for dividend-paying
stocks is the Edward Jones Equity Income Buy List, a list of
approximately 20 Buy-rated stocks that on average offer
a dividend yield greater than 3% – well above the market
yield near 2%. Most of these stocks also offer aboveaverage dividend growth potential (average 7% per year
outlook), good historical dividend growth (average 8%
most recent increase) and attractive prices.
Actions for Investors: Add Rising Income Today
We believe now is an especially compelling time to consider rising income
stocks for your portfolio, including those on the Edward Jones Equity Income
Buy List. Take this opportunity to talk with your financial advisor about
appropriate ways to include rising income as part of your overall portfolio.
*Past performance is not a guarantee of future results.
Diversification does not guarantee a profit or protect against loss. Dividends can be increased,
decreased or eliminated at any point without notice. Before investing in equities, you should
consider the risks involved, including loss of principal. Share prices will fluctuate with changing
market conditions, and performance is not guaranteed.
www.edwardjones.com
Member SIPC
PAGE 2 OF 2 RES-5836C-A EXP 28 FEB 2018 © 2017 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.
Focus on Higher-quality
Dividend Growers
Companies that pay and grow their
dividends over time have historically
offered several benefits, including:
• Rising income potential to help
offset inflation – A potentially
growing stream of dividend income
can help offset rising prices over
time.
• Quarterly or monthly income – While
most companies pay dividends
quarterly, you can receive monthly
income by staggering your stocks’
dividend payment dates. Ask your
financial advisor about our Monthly
Income Plan that can help accomplish this.
• Total return potential – Dividends
have historically been an important
part of the total return from stocks.
According to Bloomberg, since 1950,
dividends (with reinvestment) have
accounted for approximately 90%
of the total return of stocks, and
we expect growing dividends to
continue to play an important role
in stock returns.
• Track record of good performance –
Dividend-paying stocks have performed well over long periods of time
and have dramatically outperformed
the highest-yielding stocks and those
that don’t pay a dividend. In addition,
stocks in companies that have been
able to grow their dividends have
outperformed stocks that pay a
dividend but have not been able to
grow it (see chart above).
• Likely less sensitive to rising interest
rates – Stocks with more moderate
yields and rising dividends should be
less affected by the rise in long-term
interest rates than stocks with high
yields and low growth.