In this turbulent market the spotlight has been recast on dividend-centric stocks. These stocks are from companies with stable business models who pay sizable dividend yields that have continued to grow overtime. As an investing class, they are seen as largely “value” stock and are often prescribed for the more conservative investor.
Whether you are that conservative investor that gravitates toward value stocks or some other type of an investor, the dividend driven value stock sector of the investment universe should interest you. Why? This investment realm should be of interest because a major demographic shift is in the process of occurring in which dividend driven value stocks will become the life blood for a huge class of investors.
Demographic shifts have consequences from the types of goods and services people make to the type of investments people enter into. As the Baby Boomer generation transitions into the time of their retirement, the reliance upon dividend income will become more significant than ever.
Stable, sizable and regular income payments will be needed by a growing pool of retirees. Thus, demand for such stocks will rise throughout this decade.
Looking at a recent McKinsey Institute report titled, The Emerging Equity Gap, the institute foresees a future environment where raising capital through equity offerings will become increasingly more expensive for businesses. This consequence will occur because large amounts of wealth will not be focused on equity driven investments, but debt driven instruments, such as bonds.
Why does McKinsey foresee a favoritism of debt over equities? First, the shift transition of a large amount of the current working population into a state of full or semi retirement will cause personal and pension investments to be geared towards investments which are more secure and make regular payments. Bonds (debt) issued by private or public organizations is a tool that fits the need. In general equities do not. Yet, certain areas of equities do fulfill the need for stability and consistent cash distributions (dividends).
While I agree with the conclusions made the McKinsey study, I must add that all equities are not equal. Different classes will be treated differently because of the nature of the investment.
Equity offerings will become more expensive because companies raising capital through equity are usually those that are in growth mode. Value stocks are not known for raising capital through massive equity offerings and often offer dividend yields that are comparable or superior to bond yields.
Forget about the notion that McKinsey noted regarding equity offering becoming more expensive. The point to take away is that a huge class of investors is transitioning towards investments that provide a revenue stream. Value stocks that have a history of paying sizable dividends fit that need.
As we move into 2012 and throughout the decade, it would be prudent for investors to begin at least by identifying, if not investing in, value stocks that have shown characteristics of price stability, consistent dividend payments and dividend appreciation. Such characteristics will bode well as more retirees look to establish a steady income stream to support themselves in their retirement years.