Dividends & Diversification Webinar Q&A Follow-Up
We would like to thank all who attended our Dividends & Diversification webinar with John Buckingham and wanted to offer a follow-up for questions during the Q&A session we were unable to get to in the allotted time.
Question: Even though The Prudent Speculator solely recommends individual stocks for subscribers, do you think a “Dividend & Diversification” strategy (for a portion of one’s portfolio) might best be met with a dividend ETF instead?
Answer: Each investor’s circumstances call for a tailored plan. Dividend ETFs, active or passive, can offer simplicity and broad market exposure that sometimes outshine a basket of individual holdings. A 401(k) that restricts single-stock purchases, for instance, might be better served with a diversified Value fund rather than a concentrated S&P 500 tracker. Yet a hand-built stock portfolio can provide lower costs, greater control and meaningful tax flexibility that ETFs cannot match.
The real foundation is thorough a financial plan. Once objectives and constraints are clear, the choice between ETFs and individual securities should follow naturally, with each vehicle selected to advance your long-term goals.
Question: What are the differences between the various portfolios you show on your website?
Answer: Our four newsletter portfolios are constructed with the same methodology. There are differences in inception date and the holdings in each, but the same investment philosophy, buying a broadly diversified basket of undervalued stocks, is utilized for each portfolio. TPS Portfolio and Buckingham Portfolio our real-money accounts, while Millennium Portfolio and PruFolio are hypothetical.
Question: What is your thinking for retired people on reducing fixed income allocation in favor dividend growth stocks?
Answer: Every financial situation is different and warrants a tailored approach. Some investors more than meet their retirement needs and shift their focus to future generations, while others rely on their portfolios to fund day-to-day living, with many landing somewhere in between. There is no universal rule that fits every case, yet we often see clients benefit from heavier fixed income allocations, while others are better served by greater emphasis on dividend-paying Value stocks.
If you would like to discuss what mix might suit your circumstances, we encourage you to reach out to Jason Clark, CFA at jclark@kovitz.com to explore how partnering together could support your long-term objectives.
Question: There are a few REITs in the list. Can you comment on why this might be an opportune time to invest?
Answer: Given that REITs have lagged the overall market by a wide margin this year, while they generally do well when interest rates are falling, given that their dividend yields become more appealing, we think it a favorable time to be adding them to a broadly diversified portfolio. We generally appreciate REITs for their stability and income generation potential. Note that we prefer to use Funds from Operations in place of Earnings when doing metric calculations.
Question: Why do you not have more Energy stocks on your list seeing that their yields are so high?
Answer: There are compelling opportunities in the Energy space today, but we also want our portfolios and recommendation lists to remain diversified. Yield is only one input in our quantitative process. It helps frame income potential, yet it sits alongside other factors that determine our long-term Target Prices. Diversification keeps any single sector, including Energy, from exerting too much influence on results, and it ensures we balance yield potential with businesses that can grow shareholder wealth in other ways.
Question: What triggers the sale of an underperforming stock in your portfolio? e.g. why did you sell Manpower (MAN) when you did?
Answer: Every stock is fighting for a position in our portfolios, even our winners. We might part with a stock because its weight becomes too large for our comfort (as we’ve been doing with our Tech stocks lately), or because there’s a better opportunity elsewhere. With Manpower specifically, the company has struggled to find its footing and we thought the low weight wasn’t worthy of a bring-up. Our full Sales Alert is here.
Question: I notice that my own portfolio ends up being yield weighted…in other words I have more invested in high yield stocks than low. Are there any ETFs that deliberately follow that idea?
Answer: While yield is a valuable trait that can support many investor goals, we treat it as a bonus factor in our quantitative framework. We do not want to penalize strong businesses simply because they choose not to distribute cash. Share repurchases serve as an equivalent way to return capital, and many firms actively buy back stock alongside paying dividends. That benefit will not surface in a yield-weighted ETF or managed account, so we prefer to evaluate total capital return rather than weight our portfolios on yield alone.
Question: As a follow on from the Dividend ETFs versus individual stocks, can you refine your discussion to foreign dividend ETFs? As I look at the slide I see all your undervalued diversified dividend payers are U.S.
Answer: Our investment universe includes all U.S.-listed stocks with adequate liquidity plus more than 100 foreign companies accessible through U.S.-traded depository receipts. This broad set gives us ample diversification opportunities and the flexibility to pursue attractive companies beyond U.S. borders when the case is compelling.
Directly trading foreign securities in their home markets can be difficult. Investor protections may be weaker, currencies can skew outcomes and tax rules often add complexity. Using U.S.-traded receipts allows us to capture global exposure while avoiding many of those operational hurdles.
Question: Shouldn’t the goal be to have your total yield be higher than either the current yield in a money market account or the current 10-Year bond yield?
Answer: This can be an investor’s goal, but we don’t see why it should be a rule for everyone. Our portfolios are built for long-term total return, not short-term income maximization. Many companies choose to reinvest their cash rather than paying it out (or at least repurchase shares), which can be a better generator of capital appreciation over time than a higher upfront yield. Forcing the portfolio to out-yield money markets or Treasuries would be a volatile endeavor and could push one toward slower-growth companies or riskier names that pay elevated dividends because their fundamentals are weaker.
We would argue that a more useful question is whether your overall allocation fits your needs for income, growth and risk. If cash flow is the primary objective, consider that fixed income can carry more of the load. If growth is the priority or you can benefit from long-term investing, equities don’t need to beat bond yields on income because they aim to beat them on total return over time.
