Dividend Investing Strategies for a Shifting Market Landscape

Key Quotes

"by my count there's over 1 trillion in funds and etfs that screen for dividends or dividend weighted on a global basis and over the years our team at Morningstar Indexes has developed a lot of different dividend weighted dividend screened indexes from high yielding equities to dividend growth to combining dividend and buybacks and I happen to think that dividend investing is just a good way to participate in the equity market not just for income but also for total return."

Dan Lefkovitz highlights the significant global investment in dividend-focused funds and ETFs, indicating that dividend investing is a substantial market segment. He argues that this approach offers investors a valuable method for participating in the equity market, providing not only income but also contributing to overall total return.

"now is very very heavily weighted to technology stocks especially AI stocks you know and just neglecting Nvidia would be a massive detractor to any portfolio on a relative basis it's passed 5 trillion in market cap so I really blame AI there."

Dan Lefkovitz explains that the broad U.S. equity market's performance has been significantly influenced by technology and AI stocks, using Nvidia as a prime example of a company whose market capitalization has grown substantially. He attributes the lagging performance of dividend indexes, which typically have less exposure to these tech giants, to the dominance of AI-driven growth in the overall market.

"buybacks can be more opportunistic you know when the company has cash on hand or really preferably when the shares are undervalued right right as opposed to when they as a dividend you're buying them back."

Dan Lefkovitz contrasts stock buybacks with dividend payments, characterizing buybacks as more flexible and opportunistic. He explains that companies can engage in share repurchases when they have excess cash or when their stock is undervalued, whereas dividend commitments are generally viewed as more steadfast obligations to shareholders.

"just because a company has a five 10 15 50 year record of paying out a dividend doesn't mean it's going to continue the past isn't necessarily predictive we've seen a lot of companies over the years that are considered you know dividend champions or dividend aristocrats however they're marketed that end up reducing you know eliminating their dividends."

Dan Lefkovitz cautions against overemphasizing a company's dividend history as a sole indicator of future dividend security. He points out that even companies with long-standing dividend records, often marketed as "dividend champions" or "aristocrats," have been known to cut or eliminate their payouts, suggesting that past performance is not a reliable predictor of future sustainability.

"so simply put the payout ratio is the percentage of the company's earnings that it pays out in dividends and you want there's kind of a happy medium where you want the company to be generous with how much cash it's returning to shareholders but not so generous that the dividend you know ends up being unsustainable."

Dan Lefkovitz defines the payout ratio as the proportion of a company's earnings distributed as dividends. He suggests that investors should look for a balance where companies are returning cash to shareholders but not to an extent that jeopardizes the dividend's sustainability, implying that an excessively high payout ratio can be a warning sign.

"companies with economic moats tend to sustain their dividend payments better than companies without moats and we should say about the payout ratio companies with with um lower payout ratios or let's just say companies with high payout ratios tend to cut their dividends more frequently."

Dan Lefkovitz presents findings from research indicating a correlation between a company's economic moat rating and its ability to sustain dividend payments. He notes that companies with strong competitive advantages (moats) are more likely to maintain their dividends, and this is further supported by the observation that companies with higher payout ratios tend to cut dividends more often.