Generating Potential Income from your Portfolio: Dividend Edition
David Furst, CFA, Advice Strategy
Taylor McLeod, Analyst
When investors near retirement, attention often turns to generating income from their portfolios as regular paychecks become a thing of the past. With life expectancies in the United States hovering around 80 years, that could leave decades of retirement for which investments are relied upon for living expenses. With such a long span of time to cover, forward-thinking investors are seeking more ways to potentially generate income from their investments.
This report will not focus on bond investing (a common income strategy) but instead will highlight a supplementary strategy designed to generate income in a portfolio: investing in dividend-paying stocks. While not guaranteed, these dividend payments can add significant benefit to the positions’ return. When expressed with a $100,000 hypothetical portfolio in the chart below, the difference that dividends can make is stark. Including dividends (called total return) more closely resembles what investors may experience in their real-world portfolios, versus price return which excludes the impact of dividends and captures only capital appreciation.
Price Return vs. Total Return
The previous chart illustrated how much additional return that dividends may provide to investors when included in the equity portion of their portfolio. At Wells Fargo Advisors, expert equity analysts comb through the markets in effort to find industry-leading companies which they feel provide investors with consistent dividend growth over the long-term. These stocks comprise the Diversified Stock Income Plan or “DSIP” list. By deploying an equity-income strategy, investors may benefit from the periodic income that dividend-paying shares provide. Additionally, they attempt to hedge their exposure to inflation risk while capturing growth from a potential rising stock market environment through capital appreciation. To illustrate this, the chart below shows the hypothetical growth of the S&P 500 Index for the period between 1994 and 2021 including dividends (total return), expressed with a $10,000 starting portfolio. The blue line represents the hypothetical growth of the same $10,000 invested in the DSIP list securities over the same time period.
DSIP Total Return vs. S&P 500 Total Return
With the help of a trusted advisor and an investment plan, investors can position their portfolio in effort to achieve their goals and help ensure that they do not outlive their funds. Dividend-paying stocks are not a replacement for an allocation to bonds, however, they can offer benefits that some investors may find attractive, such as the potential for dividend growth and capital appreciation. Talk to your advisor if you think an equity dividend strategy may be right for you.
RESEARCH, CHARTS, AND ILLUSTRATIONS PROVIDED BY JUANA DIEZ DE ONATE – WEALTH & INVESTMENT MANAGEMENT ANALYST
Performance Results Calculation Methodology
The hypothetical growth of $100,000 chart illustrates the hypothetical performance of a $100,000 investment made in the list since inception in November 1993. Labels for each year are not included on the horizontal axis due to a lack of space. It assumes the reinvestments of dividends and capital gains. A separate line indicates the growth of the benchmark S&P 500 Index for the same period. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. See following page for important information. Actual results for clients may differ to those presented due to various factors including but not limited to, commission or transaction costs as well as the timing of specific security transactions. DSIP List performance is calculated by geometric linking daily security returns. Dividends are reinvested on the Ex-date. The list is equal weighted, which assumes each security is given the same (or equal) market value. The list is rebalanced when changes are made or at the end of the year if no changes were made during the preceding calendar year. We measure all performance from the time each stock is added to the list to the time that it is removed, or the last date of the measurement period. There are times when a deleted stock has been reinstated, in which case its performance is treated as two separate positions. A complete listing of all DSIP List recommendations is available upon request which includes the date and price of each initial recommendation, the date and price of the recommendation at the end of the period (or when liquidation was suggested) whichever was earlier. Index returns do not represent investment returns or the results of actual trading nor are they forecasts of expected gains or losses a fund might experience. Index returns reflect general market results assume the reinvestment of dividends and other distributions, and do not reflect deduction for fees expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. Past performance does not guarantee future results.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.
DSIP List performance is calculated by geometric linking daily security returns. Dividends are reinvested on the ex-date. The list is equal weighted when rebalanced, which assumes each security is given the same (or equal) market value. The list is rebalanced when changes are made or at the end of the year if no changes were made during the preceding calendar year. We measure all performance from the time each stock is added to the list to the time that it is removed, or the last date of the measurement period. There are times when a deleted stock has been reinstated, in which case its performance is treated as two separate positions. Detailed list changes are available for the most recent four calendar quarters. For this and other information, please contact your financial advisor.
Wells Fargo Advisors has developed this list to help our clients with their financial goals. However, Wells Fargo Advisors also recognizes that every client has a unique investment objective, risk tolerance and time horizon for their various investments, therefore securities on the DSIP list may not be appropriate for all investors.
Asset Class Risk
Equity Securities: Socks are subject to market risk, which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. There is no guarantee that dividend-paying stocks will return more than the overall stock market. Dividends are not guaranteed and are subject to change or elimination.
Fixed Income: Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond's price. Credit risk is the risk that an issuer will default on payments of interest/or principal. This risk is heightened in lower rated bonds. High yield fixed income securities (junk bonds) are considered speculative, involve greater risks of default, and tend to be more volatile then investment grade fixed income securities. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. U.S. government securities are backed by the full faith and credit of the federal government as to payment of principal and interest if held to maturity and are subject to interest rate risk.
All investing involves risk, including the possible loss of principal.
Wells Fargo Advisors is registered with the U.S. Securities Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.