Dividends Will Matter More Than Growth by 2030: Here’s My Case
In a nutshell, I try to buy well-run dividend stocks when they have historically high yields. It’s an income approach with a value bias. But the real lynchpin is the dividend, the cash a company pays to shareholders as a reward for being shareholders.
You can think of dividends as a portion of earnings distributed directly to shareholders. However, dividends are paid from cash flow (the cash flow statement shows the financial impact of dividend payments). Dividends tell you more than you might think about an investment, and I believe more investors will focus on dividends by 2030 (and beyond). Here’s why.
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Dividends transcend the growth versus value discussion
Many investors focus on either growth or value stocks. You can easily go in either direction with exchange-traded funds (ETFs) like Vanguard S&P 500 Growth Index ETF (VOOG +0.95%) or Vanguard S&P 500 Value Index ETF (VOOV +0.39%). Using Vanguard S&P 500 Growth Index ETF as an example, it takes the S&P 500 index (^GSPC +0.73%) and screens for growth characteristics using metrics such as earnings change-to-price ratio, sales growth, and momentum. It has a super low 0.07% expense ratio and is a solid option for growth investors.
But what happens when growth investing is out of style on Wall Street? Then Vanguard S&P 500 Value Index ETF will likely be outperforming, and Vanguard S&P 500 Growth Index ETF will be underperforming. In fact, growth and value often switch places. Trying to switch with investor sentiment can easily lead you into market timing, which is hard to do successfully over the long term. In my opinion, a better option is to focus on dividend stocks.
Vanguard Admiral Funds – Vanguard S&P 500 Growth ETF
Today’s Change
(0.95%) $0.81
Current Price
$86.50
Key Data Points
AUM
$27B
Dividend Yield
1.57%
Expense Ratio
0.07%
Top Holdings
NVDA
14.85%
MSFT
10.47%
AAPL
6.46%
This way, you can see a tangible return on your investment, which will help keep you invested through the market’s inevitable ups and downs. This is a key reason why now is a good time to consider dividend stocks. That market is near all-time highs despite a host of potential risks, such as geopolitical conflict, elevated debt levels, and rising inflation. If there is a bear market between now and 2030, you can focus on your dividends instead of focusing on volatile stock prices.
More income for paying the bills
There’s a longer-term story here, too. When investors are building their nest eggs, they tend to favor capital appreciation. But when they retire, generating income from that nest egg often takes center stage. Dividends let you do that, and you don’t have to touch principle (a huge plus when there’s a bear market depressing the value of your nest egg). With the baby boom generation continuing to enter retirement, dividends are likely to grow in importance at least through 2030, if not well beyond that date.
Which brings up another important point: dividend investors have to find a balance between yield and dividend growth. What’s notable here is that this often leads to a similar divide between growth and value stocks. For example, Schwab U.S. Dividend Equity ETF (SCHD +0.18%) uses a complex screening process to identify financially strong, growing companies with attractive yields and rising dividends. The ETF’s yield is attractive at around 3%, and the dividend has trended generally higher over time, as has the ETF’s price.
Schwab U.S. Dividend Equity ETF
Today’s Change
(0.18%) $0.06
Current Price
$32.72
Key Data Points
AUM
$108B
Dividend Yield
3.22%
Expense Ratio
0.06%
Top Holdings
TXN
4.67%
QCOM
4.58%
PG
4.24%
At the other side of the spectrum is an ETF like Invesco High Yield Equity Dividend Achievers ETF (PEY +0.20%). It has a 4.2% yield and holds the 50 highest-yielding stocks from a list of companies that have at least 10 annual dividend increases. That leaves it with something of a value bias, since the highest-yielding stocks are often the ones that are most unloved on Wall Street. The point is, you don’t have to give up on growth or value investing to also be a dividend-focused investor. (I actually own both of these ETFs to get a mix of dividend growth and high yield.)
Know yourself and your real financial needs
Stocks go up and down, often in dramatic and unexpected ways. Dividends can help you stick to a long-term investment approach when volatility kicks up, like during a bear market. Dividends also provide a tangible return of cash that you can use to pay the bills when you don’t have other sources of income, like in retirement. I think both of these issues will be increasingly important in 2030, if not sooner.
I prefer to buy individual dividend stocks, but you can also buy ETFs that focus on dividends. And the way you use dividends can still let you bias your portfolio toward the more typical value-versus-growth approaches that dominate Wall Street. When you step back and look at the big picture, there’s no reason to wait until 2030 to focus on dividends; You can use them today to power your investment approach.
