Investors seeking regular income are limited because traditional sources aren’t producing the results they used, says Dave Makarchuk, partner and Western Canada wealth business leader at Mercer, noting bond yields are really low and coupons are low.
“And so dividends can be an attractive option for those who are seeking regular cash flow,” he says.
As well, stocks that regularly pay dividends aren’t as volatile as those that don’t pay a dividend, according to empirical evidence, he notes.
Dividend payments in equities is the topic of a new paper by Mercer, which highlighted a few different approaches investors can take to generate an above-average dividend yield.
“Each approach has different characteristics and is suitable for different types of investors,” the paper noted. These include systematic yield approaches, value approaches, pursuing capital discipline or dividend growth and seeking to maximize income using derivatives or taking a multi-asset approach.
Long-term investors shouldn’t ignore income strategies, noted the paper. “However, a clear focus on avoiding strategies that incorporate unnecessary constraints and an understanding of the characteristics of any strategy are crucial for such an investor.”
As well, approaches that look to maximize income or multi-asset approaches may be the most appropriate for retirees because they’re expected to provide more risk management and shallower drawdowns, it said.
While retail investors are more likely to embrace dividend-focused strategies, institutional investors also look to dividend paying stocks as one of many options when building their equity portfolios, says Makarchuk.
This may be more applicable in the defined contribution space, he adds, especially for people in the decumulation phase or really close to retirement where regular income is attractive. And many DC plan providers now offer a dividend-focused pooled fund for members, says Makarchuk.