Strategies

Consumer Linked Income Portfolio

Dividend Growth

= Potentially Rising Income.

As illustrated in the chart below, the SPY (an exchange traded fund (ETF) representing the S&P 500 Index) and XLP (an ETF representing the S&P 500 Consumer Staples Sector) generated a similar dividend income at the beginning of 2004 while the IEF (an ETF representing the Barclays US Treasury 7-10 year index) provided more than twice the income. However, during this ten year period, the SPY dividend grew by 53%. The XLP grew its dividend by 188%.

Meanwhile, the “safer” US Treasury income (represented by IEF) plummeted by 45%. Even worse, the bond income is likely to decline further if the higher yielding bonds in the ETF mature and are replaced by bonds with lower yields. Importantly, this illustration assumes that dividends were distributed, and not reinvested. This means that the dividend growth was organic and did not rely on additional deposits or reinvestment of income. A further benefit of an increasing dividend is that over time your income from that investment may grow, even if you are not reinvesting those dividends.

chart_clip_dividend_growth_distributed

The chart above reflects the annual dividends from the SPY, XLP and IEF, exchange traded funds that closely track the S&P 500 index, S&P 500 Consumer Staples Index and the Barclays Capital U.S. 7-10 Year Treasury Bond Index, respectively. In this illustration, the dividends were “paid out” to show the effect of spending the available income. The illustration does not reflect the deduction of management fees, taxes or transactional cost and is presented for informational purposes only and not as a recommendation. Past performance is not indicative of future results. Indices are unmanaged and not available for direct investment. Source: Morningstar