Dividend Income vs. Growth Portfolios: How We Think About Them

Hello, YieldAlley readers! In this week’s newsletter:

• Cash Income Opportunities: Money market funds, brokered CDs, Treasury bills, and ultra short-term bond ETFs.

• Read of the Week: Dividend Income vs. Growth Portfolios: How We Think About Them

• Elsewhere: FDIC considers index investing regulations, Netflix cofounder’s investing record, U.S. jobs report, Interest rates signals, New tax optimized muni bond ETF

• New Posts: How to increase your savings rate to over 5% on Bank of America and PNC Bank (hint: use their self-directed brokerages to buy ultra short-term ETFs or money market funds)

Cash Income Opportunities For the Week Ending April 5, 2024

Government Money Market Funds (7-Day Yields)

Charles Schwab Money Market Funds

• SNVXX (Schwab Government Money Fund - Investor Shares): 5.04%

• SNSXX (Schwab U.S. Treasury Money Fund - Investor Shares): 5.02%

Fidelity Money Market Funds

• SPAXX (Fidelity Government Money Market Fund): 4.95%

• FDLXX (Fidelity Treasury Only Money Market Fund): 4.93%

Merrill Edge and Merrill Lynch Money Market Funds

• TTTXX (BlackRock Liquidity Funds: Treasury Trust - Institutional Class): 5.19%

• TOIXX (Federated Hermes Treasury Obligations Fund - Institutional Class): 5.17%

Vanguard Money Market Funds

• VMFXX (Federal Money Market Fund): 5.27%

• VUSXX (Treasury Money Market Fund): 5.27%

Brokered CD Rates (6-Month)

• Charles Schwab: 5.32%

• E*Trade: 5.25%

• Fidelity: 5.25%

• Merrill Edge and Merrill Lynch: N/A

• Vanguard: 5.30%

T-Bill Rates

• 3-Month: 5.37%

• 6-Month: 5.33%

• 1-Year: 5.07% (up from 5.04% last week)

Ultra Short-term Treasury Bill and Floating Rate Note ETFs (30-Day Yields)

• SGOV (iShares 0-3 Month Treasury Bond ETF): 5.29%

• BIL (SPDR Bloomberg 1-3 Month T-Bill ETF): 5.20%

• USFR (WisdomTree Floating Rate Treasury Fund): 5.37%

• TFLO (iShares Treasury Floating Rate Bond ETF): 5.39%

Dividend Income vs. Growth Portfolios: How We Think About Them

Last week, we reviewed the 5 highest yielding S&P 500 Dividend Aristocrats. Many of these businesses are boring conglomerates that have been around for multiple generations, operating in industries like industrials, transportation, real estate, and asset management.

We ended our introduction to these 5 Dividend Aristocrats stating that it’s best to identify dividend stock income opportunities both total return (growth) and income (stability) potential. These opportunities can come in the form of individual dividend stocks or dividend funds and ETFs.

Before we dive into any specific dividend income opportunities, it’s best to understand the differences between dividend and growth opportunities, how each investment type has fared over the last few decades, and how to take advantage of both.

Why has there been such a resurgence in dividend income interest?

High-growth stocks, primarily technology companies, have traditionally returned cash to shareholders indirectly through buybacks, not dividends. So when Meta, the parent company of Facebook, and Salesforce announced in February 2024 that they would begin paying a dividend this year, many claimed a dividend investing revival.

We believe paying dividends is a trend that larger tech companies will want to offer to give more income stability to their shareholders. But while Meta is set to pay $5.3 billion in dividends this year, it has authorization to spend $81 billion on stock buybacks!

Claims that dividend investing is back is overblown… since it never went away in the first place.

How have dividend stocks fared vs the broader market index?

In the past 30 years, from 1994 until the end of 2023, the S&P 500 returned an annualized 10.1% return. You might think that the dividend indices underperformed during this time. Yet, the Dow Jones U.S. Select Dividend Index returned 10.7% during the same 30-year period, beating the returns of the S&P 500.

Why?

We consistently tout the reason to our readers: stability and consistency.

In the last 30 years, dividend stocks did not experience the same massive drawdowns that the broader market went through. During the dot-com bubble in 2000, the S&P 500 market lost close to 10% that year, but the dividend index produced a total return of almost 25%. The S&P 500 continued to produce negative returns in 2001 and 2002, while the dividend index gained in each of those three years.

Those three years of losses for the S&P 500 meant it never caught up to the dividend index over the 30 years.

When evaluating income and investment opportunities, the best opportunities will exhibit growth and high-quality business characteristics with minimal drawdowns and periods of negative returns. This will result in outperformance over a longer time horizon. Even attempting to mirror index investing returns with lower volatility will result in better peace of mind and performance for our portfolios.

Many growth + income opportunities exist across dividend funds, stocks, and growth companies that now pay dividends. We’ll highlight specific opportunities in the coming weeks.

But let’s not forget that bonds and fixed income reign supreme for producing these types of returns, as long as we manage risk appropriately. Bonds not only produce stable income but can also be part of a total return strategy.

• FDIC considers regulations that would limit the power of index fund managers (link)

• Netflix cofounder Reed Hastings kept losing money as an investor (link)

• U.S. economy added more jobs than expected in March (link)

• Fed’s Kashkari says 2024 rate cuts aren’t guaranteed (link)

• New municipal bond ETF promises more tax optimization (link)

We’d love to hear from you. If you have any feedback or thoughts, please feel free to directly respond to this email with your message. Our ChatGPT bot is also available for your questions, as is our Facebook group.

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