When people in the Seattle area approach me for wealth management services, they are often disgruntled by the performance of their portfolio. Usually, this is after a downturn. This is because they did not fully understand the risk profile of their portfolio until it was exposed in a capital market downdraft.
Case in point: The coronavirus pandemic roared into the US in late February, causing an abrupt downturn in the financial markets and major hit to the economy – ending the longest bull market in US history. Despite what appears to be a market rally and some positive indicators of recovery, there is still significant uncertainty about the pace and strength of what an economic recovery will look like. Many people were shocked by the volatility of their portfolio during this time frame.
During times of uncertainty, investors often look for potentially less risky stocks to park some money. And they often look to quality stocks with defensive characteristics to fill this role.
A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. There is a constant demand for their products, so defensive stocks tend to be more stable during the various phases of the business cycle.
Within stocks that pay dividends, investors will also often look at how consistently a stock not only pays its dividends, but also how consistently it increases its dividends. Consistent dividend payouts and dividend hikes typically signal good cash flow, which in turn often reflects the ability of a company’s management team to be disciplined and competitive. Layer years of annual dividend hikes on top of this, and that signals quality for income-generating stocks.
The Aristocrats and Kings
Enter the Dividend Aristocrat and Dividend Kings, a portfolio of which can have yields of 2.4-2.5%. This yield compares favorably with yields on fixed income alternatives and has the potential to increase over time. While there is the potential risk of dividend cuts in a difficult economic environment, many investors think that this risk can be mitigated by carefully selecting companies that are committed to paying and maintaining their dividend.
Dividend Aristocrats are companies in the S&P 500 Index that have raised their dividend payouts annually for at least 25 consecutive years. To be crowned King, companies must have issued annual dividend hikes for at least 50 years! Not surprisingly, there are not that many Aristocrats and Kings. Currently, there are 64 Aristocrats and 28 Kings.
Like any stock, not all Aristocrats or Kings are the best investment at any one given time – for instance, while one may have a solid dividend history, the stock itself may be overvalued. However, select dividend Aristocrats or Kings can play an important role in creating balanced portfolios.
Learn Whether This Wealth Management Approach Could Work For You
At Sapling Wealth Management, we specialize in crafting individualized financial plans and implementing wealth management strategies. If you are curious if there may be a place for Aristocrats or Kings in your portfolio as we navigate these uncertain times, feel free to give us a call.