Why Dividends Matter

Christopher F. Poch, Private Wealth Advisor

"... (The true investor) will do better if he forgets about the stock market and pays attention to his dividend
returns and to the operating results of his companies."
‐ Benjamin Graham
World Commodities and World Currencies, 1944, p. 42

In over 33 years in the wealth management companies that focus on growing their cash flows, When selecting dividend‐paying stocks, I believe
increasing dividends and repurchasing shares. it is important to focus on these critical data
industry, I have seen what works for the long-
points:
term, tax paying investor. Dividends Paying Stocks vs. Non-paying
The importance of dividends and the contribution  Current yield vs. historic average yield
A recent study by Factset shows that dividend  Dividend payout ratio (dividends per share
to overall total return, for new and experienced paying stocks outperform their non-paying
investors alike, should not be overlooked. versus earnings per share)
counterparts by a dramatic amount. From 1991
Portfolios focusing on growing dividends can  Annual earnings growth compared to annual
through 2015, non-dividend paying stocks earned
deliver strong long-term returns regardless of the just +4.18% return per year while dividend paying dividend growth
market cycle. Dividend paying companies, in
stocks significantly outperformed with a +9.7%  Quality of dividend sources
general, tend to be higher quality with stronger average annual return.
balance sheets than non-dividend paying
companiesi.

Not only do dividend stocks as a group have less

volatility year- to- year, they outperform non-
dividend paying stocks over time as wellii. During
bull markets, investors often forget that total
return comes from two sources: Dividends and
price appreciation. We believe that today quality Exhibit 4vi
companies trade at more reasonable valuations
than the market as a whole. Exhibit 2iv Dividends Can Be a Defensive Tool

Dividends Account for 40%+ of Total Return Increasing Dividend Paying Stocks With tens of billions of dollars trading hands
Outperformed every day on the New York Stock Exchange
In fact, over the last 90+ years, dividends have alone, it's easy to lose sight that when purchasing
accounted for more than 40% of the total return Those that paid a dividend and raised it year after a stock investors are effectively purchasing
equation. year outperformed the benchmark in 17 of the 23 ownership interest in a business. Assume for a
years. moment that you don't get a quote every day for
your shares in that business and that you can't sell
your ownership interest for several decades. Your
focus would likely shift from price to value.

And the value of that business, whether publicly

traded or privately held, is the present value of all
future cash flows. After all, what is the point in
owning a business – or any investment – if you're
never going to receive any cash from it? When a
company generates positive free cash flow, it has
several options; the company can hold cash in
Exhibit 1iii reserve, fund organic growth, make acquisitions,
Exhibit 3v pay down debt, or return it to shareholders
Investors who focus solely on price appreciation through dividends or stock buybacks.
Rising Dividends, Moderate Payout
are implicitly pegging their total return only to the
price change of the stocks they own. However, as Many growth investors might view dividend
The sweet spot for dividend investing, in my payments negatively in lieu of earnings retention.
history reveals, this can lead to disappointing
opinion, seems to be at the intersection of But in a more risk‐averse investing climate,
results for investors over long time frames. With
companies increasing their dividend with the dividend payments offer an advantageous method
equity prices hovering near all-time highs,
dividend representing a conservative but of returning value to shareholders. Shareholders,
investors could be disappointed with price returns
meaningful payout and yield. just like any owner, should be concerned about
over the next ten years. I believe a better
approach for large cap allocations may be to own
maximizing long‐term value, not short-term Christopher F. Poch, Private Wealth Advisor is
earnings per share. the author of numerous articles and publications
on investing. He has managed international Common stocks generally provide an opportunity
Dividends are Regaining Popularity private banking units, advised billionaires and for more capital appreciation than fixed income
heads of state, has been the chief executive of a investments but are also subject to greater market
Below, the graph on the left shows that the S&P trust company, and founded the industry leading fluctuations, in addition unlike fixed income
500 forward earnings are estimated to be 5.9% UHNW platform. securities the company’s board of directors
while the 10 year Treasury bond is approximately decides on the size of each dividend paid or if to
2.4%. The chart on the right shows the dividend Mr. Poch advises private clients and family pay a dividend at all.
payout ratio has been below 40% while the offices.
dividend growth rate has been 6.5%.
christopher.f.poch@morganstanleypwm.com This material does not provide individually
1850 K St. NW, Suite 900 tailored investment advice. It has been prepared
Washington, DC 20006 without regard to the individual financial
w. 202-862-2861 circumstances and objectives of persons who
m. 202-557-8801 receive it. The strategies and/or investments
discussed in this material may not be suitable for
all investors. Morgan Stanley Wealth
iJeremy Siegel, “The Future For Investors”, page 126, Random Management recommends that investors
House 2005 independently evaluate particular investments and
ii IBID strategies, and encourages investors to seek the
iiiSource: Calculated by Morgan Stanley Wealth Management advice of a Financial Advisor. The
Exhibit 5vii GIC using data provided by Morningstar. (c) 2017 Morningstar, appropriateness of a particular investment or
Inc. All rights reserved. Used with permission. This information
contained herein: (i) is proprietary to Morningstar and/or its strategy will depend on an investor’s individual
One should expect the price of dividend stocks to content providers;(ii) may not be copied or distributed; and (iii) circumstances and objectives.
be more volatile than bonds. However, for is not warranted to be accurate, complete or timely. Neither
investors who can withstand the volatility, the Morningstar nor its content providers are responsible for any
damages or losses arising from any use of this information.
The views expressed herein are those of the
combination of moderate dividend payout and iv Source: FactSet, Fidelity Investments, as of Dec. 31, 2015. author and do not necessarily reflect the views of
growing dividends can be an attractive choice. https://www.forbes.com/sites/fidelity/2016/03/24/how-to- Morgan Stanley Wealth Management or its
pick-dividend-stocks/#617e16808c2d. This is a hypothetical affiliates. All opinions are subject to change
Still, Dividend Investing is Not Simple portfolio of low debt, high dividend yield stocks which without notice. Neither the information provided
outperformed by an average of about two percentage points
annually, and bested the benchmark about half the time. nor any opinion expressed constitutes a
As dividends have once again become more solicitation for the purchase or sale of any
popular, some companies are initiating dividends vibid. This is a hypothetical portfolio made up of companies security. Past performance is no guarantee of
in hopes of attracting investors. Some companies within the S&P500 that increased their dividends and their future results.
performance compared to the S&P500.
are doing so by borrowing to pay the dividend
vi Standard & Poor’s. Dividend growers represented by the
while others are growing their dividend faster S&P 500 Index is an unmanaged, market
S&P 900 10-Year Dividend Growth Index. Over this time
than earnings are growing – which is period the companies in this index outperformed the S&P500 value-weighted index of 500 stocks generally
unsustainable over the long-term. Companies that index. representative of the broad stock market. An
do that for too long may be forced to cut the vii Bloomberg, FactSet, Morgan Stanley Wealth Management investment cannot be made directly in a
dividend and usually concurrently experience a GIC. Past performance is no guarantee of future performance. market index.
significant drop in price. Estimates of future performance are based on assumptions that
may not be realized. This material is not a solicitation of any
offer to buy or sell and security or other financial instrument or
Dividend investing is not as simple as selecting to participate in any trading strategy. Please refer to important
the highest yielding stock with the fastest short- information, disclosures and qualifications at the end of this Morgan Stanley Smith Barney LLC. Member
term dividend growth. We posit that fundamental material. This slide sourced from Market Performance section. SIPC. Morgan Stanley Private Wealth
analysis is required and therefore active viii Westcore Global Dividend Growth Management, a division of Morgan Stanley Smith
management is best for dividend strategies. Clarifi, Compustat Barney.
Exhibit 3 (as of 12/31/2015): Treynor Ratio
The Bottom Line Return Beta CRC 1758357
Non-Dividend 6.89% 1.16
Dividend investing is not new but it has recently Payers
come back into vogue. Historically, dividend- Russell 1000® 10.44% 0.64
paying stocks have outpaced the performance of Index
non-dividend paying stocks – and have done so
with lower volatility.viii Dividend 10.62% 0.82
Payers
We believe dividend investing, under the
framework of stocks with conservative but Divided 11.20% 0.79
meaningful payout ratios and yields – with strong Growers
track records and future prospects of rising
Consistent CF 11.54% 0.64
payouts – offers potential value in an
Generators
environment where many assets are at or above
fair value. Low interest rates, strong corporate 90-Day T-Bill 3.26%
balance sheets, and investor demand should help
this trend continue.