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The world is greying – fast. The number of people over 65 will triple to a global total of two billion by 2050. People are also living much longer.
When it comes to investing, many retirees will first look for income. Having a predictable and lasting income stream is crucial for paying bills and peace of mind. For pension funds, insurers and endowments, steady income is critical for matching liabilities or supporting charitable goals.
This hunger for income comes at a time when traditional hunting grounds offer less game or have completely vanished. The yields of many top-rated bonds are at record lows. Some actually lose value after factoring in inflation. Some others are too good to be true or too scary to touch.
In this climate, we believe dividend investing to generate income – and income growth – is worth a good look. Surveying the current landscape for dividend investing, we conclude the following:
– High-dividend stocks tend to outperform most other assets in periods of low or no economic growth – exactly where we are now.
– Dividend growth historically has kept up with all but the most extreme inflation environments.
– There is potential for dividend growth: US and European payout ratios are at lows while companies are accumulating record cash piles.
– Fund flows show dividend investing has momentum but still plenty of room to grow.
Even for investors not focused on income, dividend stocks offer advantages for long-term capital growth:
– Dividend growth has been a key driver of total return in the long run.
– Reinvesting dividends has made all the difference in boosting long-term equity returns.
– High dividend stocks have tended to do better than other shares in both bull and bear markets.
To be sure, dividend investing is no cure-all for fulfilling all retirement needs or closing the pension funding gap. It is a bit more complicated than buying a basket of high-yielding stocks. Consider:
– Other asset classes, including investment-grade and high yield bonds, have tended to outperform dividend stocks during economic downturns.
– Dividend yields and growth do not impact short-term results: Capital moves will swamp dividend contributions in most 12-month periods.There are signs high yielders are becoming pricey by historical standards compared with growth stocks. For income investors, however, this may be a moot point.
– High-yielding stocks with no dividend growth tend to underperform those companies that increase dividends over time.
This publication focuses on the pros and cons of dividend investing. Other strategies to generate income, such as highyield debt, property, alternatives, preferred shares, covered call options, real estate investment funds or energy income trusts, fall outside this publication’s scope.
This publication has been produced by the BlackRock’s Investment Institute, who leverages the firm’s expertise across asset classes, client groups and regions. The Institute’s goal is to produce information that makes BlackRock’s portfolio managers better investors and helps deliver positive investment results for clients.