The Long and Short of Long-Short Dividend Investing

Financial advisors, fill in the blank: retirement ______?  If you said “income,” you have plenty of company.  After all, while many retirees and pre-retirees hope to use their accumulated wealth to leave an estate, give to charity and pursue other goals, the most common concern they have is maintaining a reliable level of cash flow that they can spend.  Historically, advisors used bond portfolios, bond funds, bond ETFs, real estate, lifestyle asset allocation programs, annuities and any number of other vehicles to solve this top retiree problem.  And certainly, all of these are still viable when the advisor and client agree it makes sense.  But ah, there is a problem.  Actually, there are three problems:

  1. Bond rates are historically low
  2. Credit markets are on dangerous ground, given decades of excessive debt buildup by governments, consumers and some corporations
  3. The broad stock market indexes (e.g. S&P 500, Down Jones Industrials, etc.) are near all-time highs, deliver a historically low dividend yield and are increasingly perpetrated by short-term traders, large ETF sponsors and institutional investors whose investment objectives could not be more different from your clients

10 Year Treasury Rate

That’s where Long Short Dividend Investing comes in.  And not necessarily as a proverbial side pocket of an income-focused portfolio either.  Long-Short Dividend investing is an excellent core income strategy whose time has come, thanks to the conditions cited above.  The key step for you is to learn about it, so you can see if and how it applies to the portfolios you oversee.

In my experience, I have concluded that a solid retirement income strategy must do five things to make the cut for the mass-affluent and high net worth investor:

  1. Produce enough income to reliably sustain the client’s lifestyle through retirement
  2. Proactively manage the downside risk of both the stock AND bond markets, to reduce the potential for big losses. What does “big” mean?  That’s a question that must be customized for each of your clients.
  3. Be highly liquid (if it takes more than a few days to get income or principal in-hand, that’s not liquid)
  4. Be mindful of taxes and actively seek to keep them low. After all, while our industry obsesses with low-cost investing, taxes can cost your client a lot more than you save in fees if you are not careful.
  5. Have clear potential to earn a long-term return (e.g. five years) beyond the income that is withdrawn. That does not mean that it must grow in value every month or even every year.  But through a combination of offense AND defense within the strategy, the investor should be able to reasonably visualize a total return that is greater than their income, net of fees, over a period of several years.

This leads to a good news/bad news situation.  The bad news is that many of the most popular income strategies fall short, either due to structural impediments or the aforementioned predicament the markets find themselves in.

Long-Short investing has been around since the 1940s.  In fact, the first hedge funds were long-short strategies.  The basic concept is that a (“long”) portion of the portfolio consists of stocks for income and appreciation potential is combined with another portion dedicated to identifying investments that the manager believes will fall in value (“short”).  Unfortunately, the hedge fund business eventually took that very meat and potatoes concept, juiced it up and turned it into a casino-like industry.  That led to the rise of mutual funds that are managed in a long-short style (over 100 of them now exist), but nearly all of them focus on growth more than income, and many use complex approaches that frankly should have stayed in the hedge fund world.


While many long-short managers try to stock-pick their way to success on both sides of the portfolio, I believe there is a more straightforward way to meet the objectives discussed above. Here’s how:

  1. The long portfolio seeks stocks that pay above-average dividends, with an emphasis on quality and stability of the dividend.
  2. The short portfolio aims to reduce the impact of broad market declines instead of stock-picking on the short side.
  3. An active process to manage volatility. Long-short investing is weakened when it is too static.  Market risks, volatility and opportunities change, sometimes suddenly.  And while I don’t endorse a day-trader’s approach to this type of investing, if you segment the portfolio according to what you aim to own for years versus months or even weeks at a time, you are in a good position to respond to whatever the market’s throw at you.  Obviously, this implies that long-short is a hands-on, process-oriented endeavor.  It is not as simple to pull off as buying a couple of index funds, but it can keep your clients’ emotions in check when all around them are losing their cool.  And at a time when market jitters are climbing to levels not often seen since the financial crisis, who couldn’t use a little more cool in their day?

To learn more about long-short dividend investing download The Hedged Investing Handbook here.

What’s your risk number? My firm has made available to readers the Riskalyze risk tolerance quiz. It takes about two-minutes to complete, and by doing so you can estimate your “investment comfort zone” for short-term market volatility. You will also be added to Sungarden’s research distribution (email) list. You can go here to take the quiz.

This material was compiled by Sungarden® Investment Research. Sungarden Investment Research provides advisory services through Dynamic Wealth Advisors. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. does not provide personal investment advice.

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