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Dividend Stocks: Is Yield Better Than Growth?

By U.S. News & World Report

There’s an old saying on Wall Street that says, “Profits are a matter of opinion, but dividends are a matter of fact.”

As U.S. and global economies accelerate and companies earn fatter profits, dividends are the proverbial “area of interest” for fact-minded long-term investors.

While various data differs, dividends have a powerful impact on investment portfolio returns. Over a five-year horizon, dividends account for 42 percent of total portfolio growth, according to Chuck Carnevale of F.A.S.T. Graphs, an investment firm in Florida. At 10 years, that figure rises to 48 percent, and at 20 years it rises to a whopping 60 percent of total returns.

But what’s the best, and fastest, path to great dividend returns? That comes down to two dividend investment strategies. There’s dividend growth, which is the annualized percentage rate of growth that a particular stock’s dividend experiences over time; and there’s dividend yield, which is a stock’s annual dividend payments to shareholders, provided as a percentage of the stock’s current price.

Unsurprisingly, there’s a difference of opinion on which strategy is best.

The case for dividend growth. “We believe that the practice of paying a sustainable and growing dividend imposes discipline on a company’s management team,” says Sean Lynch, co-head of Global Equity Strategy at Wells Fargo Investment Institute. “This discipline tends to make management teams diligent users of capital and can result in a conservative balance sheet, the efficient generation of free cash flows and a consistent focus on core operations relative to peers.”

Lynch believes “everything” must be working in concert from a fundamental standpoint to be able to continually grow the dividend. “You must have top-line growth, there must be great operators, strong free cash flow growth and the balance sheet can’t be stretched,” he says.

[See: 7 Dividend Growth Stocks to Buy Now.]

Lynch says dividend growers are typically higher quality companies that have relatively strong cash flow and relatively lower debt ratios. “We believe that dividend growers should have a better ability to ride out uncertain and volatile environments and ultimately gain share over more operationally or financially levered competitors.”

The lifestyle conditions in play for a given investor should also weigh heavily when choosing dividend investment strategies.

“In general, if the dividends are to provide for living expenses, I would go for dividend growth so that income had potential to keep up with cost-of-living increases,” says Ilene Davis, author of the book “Wealthy by Choice: Choosing Your Way to a Wealthier Future.”

“But for someone with only a short time to live, for example, or if you need higher income for a short period of time, then the current yield might be more important,” she says.

The case for dividend yield. “The best strategy is dividend yields, which have sustainable growth in payout over time,” says David Winters, CEO of Wintergreen Advisers in Mountain Lake, New Jersey. “This way an investor has an increasing yield over time. Plus, this scenario protects the investors’ purchasing power and protects against increases in interest rates.”

“Companies with a history of increasing their dividend fit this description,” Winters says.

[See: 20 Awesome Dividend Stocks for Guaranteed Income.]

A fixed- or low-growth dividend yield puts the investor at greater risk for loss of purchasing power or increasing interest rates, Winter says. “If a dividend growth stock is unable to grow, an investor will not have greater purchasing power and with higher rates the potential for capital loss,” he says. “Usually companies that have been able to grow their dividends over time represent lower risk with more upside for the investor.”

Evan Tarver, investments analyst at Fit Small Business in New York, also prefers dividend yield over growth. “Your dividend yield will tell you exactly how much a stock will pay out in dividends each quarter or fiscal year,” he says.

For example, if you know that Coca-Cola Co. (NYSE: KO) gives a dividend yield of 3 percent, you can bank on the company paying out its profits equal to at least 3 percent of the current share price, Tarver says. “Each quarter you can count on this happening, helping you better forecast your investment earnings.”

Dividend growth, on the other hand, while good, doesn’t tell you much about the payout of a stock, Tarver says.

“For example, if you know a thinly traded company has a 100 percent dividend growth, but it only paid out a 0.5 percent dividend last year, then the result is only a 1 percent dividend yield after the dividend growth,” he says. “Then what? Can we expect dividends to grow another 100 percent the next year? We really can’t expect current growth to continue into the future, making dividend yield a more predictable earnings measure.”

The best of both worlds. Naturally, there’s a third option for dividend investors that’s favored by money managers — let’s call it the “King Solomon” approach.

“If an investor is interested in dividend growth or dividend yield, the best solution is a mix of both,” says Aaron Milledge, co-founder of Targeted Wealth Solutions, in Erie, Colorado. “According to recent Vanguard research, dividend growth-focused strategies tend to have significant exposures to low volatility and quality factors. High dividend-yielding stocks tend to have exposure to value and low volatility factors.”

[See: Dividend Stocks vs. REITs: 7 Crucial Differences.]

Aside from the benefits of adding different factor exposure to the overall portfolio, sector-level diversification is aided by a mix of strategies that focus on dividend growth and yield, Milledge says. “As an example, comparing the WisdomTree U.S. High Dividend Fund ETF ( DHS) and the ProShares S&P 500 Dividend Aristocrats ETF ( NOBL) shows that despite a common concentration in consumer staples and health care, the funds have noticeably different weightings in the other sectors.”

Ask your financial advisor which dividend strategy works best for you, and start kicking some tires on one of the most impactful, reliable and profitable investment tools available.

More from U.S. News

9 Dividend ETFs for Reliable Retirement Income

7 Things to Look for in Dividend Stocks

10 ETFs That Pay Sky-High Dividends

Dividend Stocks: Is Yield Better Than Growth? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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