Interview With Eric Ervin, CEO Of Reality Shares

Vanguard recently closed its dividend growth fund. Do you think the large cash inflows into dividend strategies will negatively impact dividend investor performance going forward?

Large cash inflows into high-yield based dividend strategies will negatively impact investor performance in strategies, as many high yielding names are currently overvalued based on stronger-than-normal investor demand in the current market environment. As an example, Utilities make up just 3% of the S&P 500 market cap, but many of the largest inflows this year are going into dividend ETFs and funds with as much as a 30% allocation to the sector. However, if investors utilize a forward-looking focus to make investment decisions, we believe dividend growth investing will continue to provide solid opportunities and exhibit strong performance going forward. Ultimately, investors should focus on future dividend growth, not current yield. If earnings continue to slide, the high yield, high payout ratio companies won’t be able to maintain their dividend and the stocks will become even more volatile. We believe investors should take profits now on their high yielding, low quality names, as they have significantly outperformed the market, and then transition those profits into stronger healthier companies with good prospects for future dividend growth.

Where do you see dividend investing headed in the next 10 years?

We don’t see dividend growth investing as a recent fad. Dividends in the S&P 500 have risen in the last 40 of 43 years and have grown at nearly 6.5% annualized over this time frame. This performance is remarkably stable compared to the equity market, where since 1900 there have been 61 bull years and 54 bear years. As dividends tend to grow during bull markets and can compose a large component of total return during low growth market cycles, dividend growth investing should prove a solid investment strategy for the decades to come. The important thing for investors to consider is dividend growing stocks vs. high yielding stocks. Reality Shares research has shown many of the highest yielding names are also the unhealthiest from a fundamental perspective, while dividend growing stocks have historically outperformed dividend maintainers, dividend cutters and non-dividend payers in the S&P 500 since the early 1970s.

Final Thoughts

Thanks again to Eric Ervin of Realty Shares.Be sure to visit the Reality Shares site here.

I agree with Eric on taking a quantitative approach to dividend growth investing.I also agree that dividend growth investing is anything but a fad.Investing in high quality dividend paying businesses when they trade at fair or better prices is ‘common sense investing’.

Whether you invest in individual stocks or ETFs, a dividend growth investing approach (applied systematically) has historically produced favorable results.

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