Everybody Promises, Few Deliver

Last week, Barron’s observed that the yield on the S&P 500 is disappearing. With the current yield at 1.17%, it is close to the record low that was last seen more than 20 years ago during the 2000 tech bubble. This leads to the question of whether dividend-focused investing still works. Barron’s concluded that the current market environment is mostly about growth, leaving dividends almost meaningless. A 1% yield offers very little to reinvest and does little to offset any market declines that investors eventually encounter along the way.

 

 

It is widely known why the yield is so low. With the top seven companies of the S&P 500 comprising 30% of the index paying little or no dividends, an income is harder to find. If you are depending on the index for income, you are not living very well. Of course, you can always choose to sell a few shares to bridge the income gap, and life seems better since the S&P 500 continues to reach new heights. However, does this mean dividend investing is dead? Only if you are not willing to work harder to find it.

 

 

Despite the low yield of the index, fortunately, the dividend growth story is alive and well. Over the past three years, the dividend growth rate for the S&P 500 has managed to grow by 6.7% annually, which is nearly identical to the 100-year dividend growth rate. The yield may be lower, but the growth rate is not.

 

 

If there is a perceived need, the investment community is always willing to make money to fill it. Case in point: a recent contributor to Seeking Alpha (a platform popular with retail investors), claims he has cracked the code to increase your income while simultaneously lowering your risk. Our “expert” is selling a subscription-based newsletter promising to show you how to earn a higher income while also limiting your downside.

 

 

Be skeptical anytime someone offers you cake and ice cream for no additional cost. A foundational principle in finance is that you cannot have higher returns and lower risk at the same time. Very, very few investors pull that off, and if they do, they are not selling subscriptions. Their services are worth considerably more than that.

 

 

Our new expert makes a few assumptions to attract subscribers, which of course have no track record. He claims to have made money in March of 2020 (when the market experienced a quick 30% market decline) attempting to make his subscription more valuable. Here is part of his strategy:

 

-> Technical analysis, and two types of “events” (ex-dividend dates and earnings announcement dates) drive the tactical rotation among those stock positions. I rotate the weightings of those stocks as frequently as my process dictates. The goal: get as much dividend and price appreciation as I can each quarter, each year, and long-term, while trying to sidestep the significant and inevitable drawdowns that every stock is going to have, over and over.

-> I also wrap a pair (or two) of options on major indexes around that portfolio. Put options as “disaster protection” (a.k.a. tail risk), and call options as “return enhancement.”

 

 

The first question anyone should ask is: Why would someone retire from managing money after 30 years and then start writing a newsletter if they were truly successful as an advisor? The answer may soon be obvious. The above claims are what every investor wants, so it is easy to wonder if maybe this guy is on to something. When the three immediate benefits are higher current income, no significant downside, and long-term growth, why not subscribe? It is a simple marketing strategy: embellish the claim, tell the story often and with lots of charts, allude to a track record that is unverifiable, and someone will buy it.
The only reason our “expert” is the topic of this letter is because dividend investing is the core of what we do, so we are constantly looking for ideas. Seeking Alpha has a significant presence, and contributors can earn millions by creating a large following. It isn’t too hard to figure out why his following has grown when he claims to have the secret sauce. According to Investor.gov, the Securities and Exchange Commission website that shows a financial advisor’s background, our person of interest has worked for six different companies from 2002 – 2022. This does not imply he is an unethical advisor, but it is not exactly the track record you expect from a highly successful investor.

 

 

Dividend investing is not flashy, stocks still go down and there is no return without risk. In today’s world of unlimited access to financial media platforms, claims of imminent success are everywhere. No one wants to say that it takes time (maybe decades) to compound your income, it is not easy, and occasionally it gets scary. However, patience makes it easier. The excess cash that companies continue to generate and payout to investors doesn’t need to be wrapped in options and tactically swapped on ex-dividend dates. They just need to be left alone to compound.

Observations On The Market No. 401