Dividend and Conquer

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Hi there,

It’s been a week of big meetings if you follow climate, finance, and economic news, and our FWIW writing team traveled the globe (via the interwebs, and while holding fall mugs) to bring you a few highlights.

First stop: Washington, DC, where the much-anticipated Federal Reserve meeting ended predictably with another 75-basis-point interest rate increase. Watch for rates to keep on climbing — the Fed signaled that it may bring them as high as 4.6% in 2023 in its fight against inflation. Rising rates are expected to take a toll on earnings and the economy as a whole, so expect more herky-jerky moves from the market in the months ahead. A few things to keep in mind during these times:

• Remember the key financial rules that experts continue to repeat to us, like staying invested in a diversified portfolio and focusing on your long-term investing goals.
• As you know, timing the market is extremely hard, and historical data shows you can lose out if you pull out and sit on the sidelines.
• We’ve found these past stories on inflation and recession fighting strategies really relevant these days.
• To continue to help you understand all the elements to consider when investing, we dive into dividends later in this newsletter.

Next, we travel up to the Big Apple, where Climate Week NYC has drawn a crowd of environmentalists, public officials, executives, and even actor Matt Damon (who’s hoping you forgot about that crypto ad). The event has brought a wave of sustainability announcements from the likes of Amazon, Anheuser-Busch InBev, and GSK, along with a new report from Climate Impact Partners that shows 63% of Fortune Global 500 companies have set carbon neutral, net-zero, or renewable electricity targets for 2050. For those who couldn’t make the trek to NYC, Business Insider’s Live Blog will keep the FOMO at bay.

Another big meeting across the Atlantic will have major implications for sustainability-minded investors, though we expect it has fewer celebrity cameos. In Frankfurt, the International Sustainability Standards Board (ISSB) is ironing out the details of its new climate-related and sustainability-related disclosure standards, which are expected to make it easier to compare ESG performance across companies. If you want to know more, you can find a primer on the ISSB in our guide to ESG frameworks.

News you can use

• Silicon Valley is stuck in a long drought, and we’re not referring to dry conditions. Yesterday marked 238 days without a tech IPO worth more than $50 million. That’s the longest drought in new US IPOs this century. Stock market debuts are dwindling due to the risk-averse mood in the market, limiting the number of public sustainability-focused companies most investors can invest in. According to FactSet, 1073 companies IPO’d in 2021. In the first half of 2022, it was just 92.
  
• Want your assets to be a part of the solution, not the pollution? Green robo-advisor platform Carbon Collective just launched a new ETF that contains around 200 companies with at least 50% revenue from climate solutions. It is early days and you should always do your research before investing, but what caught our eye was this comprehensive list of holdings that allows the reader to easily scan climate solution stocks and descriptions of their businesses. In this area, Morningstar’s look at ETFs with significant exposure to climate action is also a good resource.
  
• The year after median pay of top CEOs hit a record $14.7 million, shareholders rejected compensation plans for record numbers of companies, according to PwC. The number of failed votes in the S&P 500 and Russell 3000 indexes this year were 21 and 71, respectively. Analysts warned that shareholders expect any pay metrics, including those like ESG, to be clearly linked to the company’s fundamental strategy. Next year companies will have to reveal more about their decision-making process when new rules come into effect.

Playing Defense With Dividends

With all the doom and gloom in financial headlines these days, investors are naturally seeking ways to protect their assets. One popular strategy to try to recession-proof your portfolio is buying stocks that promise both a safe haven during volatility and regular income. Say hello to …

Dividend stocks!

Many well-established companies with strong fundamentals like to distribute excess profit among their shareholders as a way to thank them and encourage them to continue holding the stock.

These distributions are known as dividends, and firms that pay them regularly are known as dividend stocks. With these stocks you earn returns in the form of price appreciation (if the stock rises) and cash.

Adding dividend stocks to your portfolio pie chart is a favorite of those seeking a steady inflow of cash and a safe, reliable bet, like retirees. Of course, terms like “cash” and “safe” are appealing to investors of all ages, and the same qualities that have historically attracted older investors make them a “defensive” play for young investors to consider during times of economic turmoil. When markets are volatile and consumer costs are rising, like they are now, experts say these financially healthy firms can offer relatively stable returns, cushion the blow to your portfolio, and help your wallet keep up with inflation.

How does it work?

Public companies announce upcoming dividends via press releases that mention the cash amount per share and payment date. These releases (you can see Microsoft’s latest here) also include the record date and ex-dividend date, which determine the investors eligible to receive the dividend.

Remember, dividends are never guaranteed every quarter and companies can decide to stop or trim them at any time (though they do try to avoid this, because it would ring alarm bells about their financial health). You also have to pay taxes on your dividends, or you can defer these taxes if you hold the shares in a retirement account.

Once you receive your dividend, it’s up to you what to do with it. You could spend it, save it, invest it elsewhere, or even reinvest it in the same company. That last option can be automated if you enroll in a Dividend Reinvestment Plan (DRIP). If dividends are reinvested in the same company, your long-term returns can be significantly boosted, as this chart shows. The power of compounding dividends has been a real driver for many long-term investors.

How do I choose?

Dividend stocks were traditionally boring old giants providing utilities or making toothpaste and sodas, with little scope for price growth. But around 80% of the S&P 500 index paid dividends last year, including the likes of Microsoft and Apple. Still, it’s hard to find high-growth companies that also pay dividends, since most need to reinvest any extra cash.

You can find stocks with the highest dividend yield (ratio of annual dividend to current share price) on a screener like this, but FWIW readers know that picking an investment solely on one basis is a mistake. Instead, experts recommend finding the “sweet spot.” These are high-quality companies with good fundamentals and analyst ratings that have a solid track record with dividends. The S&P 500 stocks with consistent dividend increases for at least 25 years are known as “dividend aristocrats” (there are just 65). You can also look at the payout ratios (dividend to net income) to judge whether a company can sustain distributing dividends in the future.

If you want a simpler way to target high-quality stocks with promising dividend growth, you can consider funds with strict criteria. For example, Global X S&P 500 Quality Dividend ETF (QDIV), Alps O’Shares US Quality Dividend ETF (OUSA), and the snooty ProShares S&P 500 Dividend Aristocrats ETF (NOBL) which only has room for the equity nobility we mentioned above.

Socially responsible investors can look for insights into the values they prioritize on a wide variety of individual stocks using providers like MSCI or Sustainalytics, or find funds designed to track companies with specific characteristics — from sustainability to faith-based values to prioritizing diversity. Examples in the ESG realm include Nuveen ESG Dividend ETF (NUDV) and ClearBridge Dividend Strategy ESG ETF (YLDE).

As the stock market takes a beating and the economic mood darkens, consider adding the safety and compounding magic of dividend stocks to your portfolio to limit the effects of any downturns. How much money you should direct to them depends on your needs and risk tolerance, but it’s important you don’t overdo it and stay well diversified at all times. Speak to a financial advisor if you’re unsure about how dividends should fit into your portfolio.

Before you go -

It’s officially fall, y’all. This handy tool will help you plan your fall foliage excursions. One of the FWIW team was in Vermont last week and they said this map hit the prediction just right!

** FWIW team members own shares of Amazon, Apple and Microsoft. We will also go the extra mile for a good (ok, cheesy) fall mug and some great foliage.

Want to learn a bit more about the writers behind FWIW? Have an idea you would like us to cover in the future?