Dividend Growth Indices - Great Investments; Some Of The Time

Source: S&P Dow Jones Indices

The long-term performance of a portfolio of dividend-paying stocks has been discussed in detail in investment literature as a sound, long-term investment strategy. The above table published quarterly illustrates the point quite clearly. It shows an investment strategy based on dividend-paying stocks not only has had superior returns, but these returns have been achieved with exceptionally low volatility when compared to other strategies.

But the performance could be improved if investors considered the impact the business cycle has on a portfolio of dividend-paying stocks as represented, for instance, by the two ETFs NOBL and DGRO.

Source: The Peter Dag Portfolio Strategy and Management

Phase 1 and Phase 2 of the business cycle are characterized by the business decision to replenish inventories following the cuts they had to make in Phase 3 and Phase 4. To replenish inventories, businesses must buy raw materials, hire more workers, and borrow money to finance the operation, improve, and expand capacity.

The virtuous cycle (positive feedback) of hiring, producing, and borrowing strengthens the economy. In Phase 2, business activity is strong as the economy is growing at an above average pace. This is the time in which commodities rise rapidly, accompanied by rising wages and interest rates. In other words, inflation is now becoming an issue.

As business fills up capacity, productivity declines, placing upward pressure on labor costs and hindering profitability.

When consumer demand wanes due to the decline in purchasing power, businesses are forced to cut inventories to match slower sales and to protect profitability. Raw material purchases are reduced, workers are laid off, and borrowing is cut. These decisions bring detrimental results (negative feedback) throughout Phase 3 and Phase 4.

At the end of Phase 4, because of the reductions implemented by business, commodities, inflation, and interest rates are declining. Productivity improves because of lower capacity utilization, and profitability hedges higher. The improvement in purchasing power due to the decline in inflation begins to stimulate demand. Businesses realize they must replenish inventories, and thus Phase 1 starts all over again.

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