I’m a fan of large-cap value/income/dividend investing. I’m also an active investor, so I mostly choose which stocks and shares to buy (often from the FTSE 100). Hence, I follow in the footsteps of old-school investors such as Warren Buffett and his mentor, Benjamin Graham.
However, I realise that there can be issues to watch out for with this value-based approach to investing capital. For instance, these three affect my family portfolio today:
1. Growth beating value
One snag with value/income investing is it has sometimes produced inferior results. For example, since the global financial crisis of 2007/09, growth stocks as a whole have delivered far greater returns than ‘boring’ value shares.
Compare the US S&P 500 index with the FTSE 100. On 6 March 2009, I vividly remember the S&P 500 bottoming out at 666 points. As I write, it stands at 6,182.72, 828.3% above this low. Meanwhile, the Footsie is up 148.6% over this period.
Thus, over the past 16+ years, US growth stocks have thrashed UK value shares. However, the above gains exclude cash dividends, which are far higher from British companies than American corporations. Also, I have high hopes that this trend will reverse, given the many bargains on offer among UK large-cap stocks.
2. The dividend drain
The second concern with dividend investing is that share prices will adjust as these payouts are made. On days when shares go ‘ex-dividend’ (the last day shareholders qualify for payment), their prices usually fall to reflect this cash payout. Of course, how much share prices drop depends on company and market sentiment at the time, but sometimes declines exceed the per-share dividend itself.
As we don’t need our dividends now, my family reinvests them by buying more shares. Over time, this increases our shareholdings and boosts our future returns. This reinvestment helps to offset and reduce the above ‘dividend drain’.
3. Price declines
Like American tycoon John D Rockefeller, I love to see my dividends coming in. That said, I’ve noticed that some of the weakest stocks in my family portfolio are high yielders. Indeed, the five worst-performing shares my wife and own — down roughly 16% to 34% — are all high-yielding dividend stocks. Indeed, double-digit yields sometimes warn of price weakness to come.
But many of our top performers are dividend dynamos…
One dividend diamond
Then again, some of our value/dividend stocks have exceeded expectations, such as the shares of Aviva (LSE: AV) — the UK’s largest general insurer and a big player in life insurance, pensions, and investments.
My wife and I bought Aviva stock for its market-beating dividend yield (in the high single digits). As I write, the share price stands at 618.4p, valuing this group at £16.6bn.
Over one year, this share is up 29.9%, while it has leapt by 128.9% over five years. This easily beats the FTSE 100 over both timescales. We paid 397p a share in July 2022 for our holding, so we are sitting on a paper gain of 55.8%.
Even after these share-price rises, Aviva’s dividend yield is still 5.8% a year, versus 3.6% for the wider FTSE 100. Of course, a run of bad claims or falling investment returns could hit Aviva’s future earnings and threaten its dividends. However, we intend to firmly hang onto our stake for the time being! And to continue investing in FTSE 100 value shares!
