CEO Insights

The Biggest Return Over a Lifetime Comes from Dividends and Interest

For most people, it's easy to build wealth if they stay the course

Small financial advisory firms possess certain advantages. Mark W. Cresap III, founder of the Pennsylvania-based Cresap, Inc., touts the flexibility of the company he began in 1990, as well as the experience of its advisors. “We place a great value on experience, and welcome advisors with established clients who have seen market cycles,” he says. “We allow our professionals to be autonomous. It’s a better situation for the client, as the advisor doesn’t promote a particular strategy or product line.” Because advisors don’t promote proprietary products, they can remain totally objective in their decisions.

cresap600x400Essential Client Education
Wall Street does a great job of complicating or obscuring fairly simple things, according to Cresap. That’s why client education is so important. Clients need to understand some fundamental concepts, such as price/earnings ratios, dividend yield, and how stocks and bonds differ. “People don’t understand what happens during a period of sustained, rising interest rates,” he says, “Such an environment is a burden for stocks and bonds.”

Cresap suggests to clients that they look at how the stock market has performed over last 50 years and what that tells them. “What has produced the surges in prices, and what has caused the flat and down periods, which will inevitably reoccur? Clients often don’t understand essential drivers of things. You don’t have to be particularly sophisticated to be a successful investor, but you must understand some fundamental things,” he says. “From the early 1980’s until now, long term interest rates have declined from 14% to 3%, producing an enormous surge in stock and bond prices. If we revert to the mean, which is around 6%, many investors will be surprised at the effect on their portfolios”

Retirement Strategies – Income Stream is Paramount
Retirement strategies depend on a client’s age and wealth. For those in their 30s, a strategy involving full investment for an entire lifetime make good sense. “If markets perform the way they have historically, [clients] will do fine over a 50-year period if they are disciplined and stay fully invested,” he says. “For those in their 80s, it’s a different proposition. They may have very appreciated assets, so do you liquidate and pay the gains and stick with treasuries and bonds, or is the income in the portfolio sufficient to carry you through to the end? Either way, the key to investing is to have an adequate income stream from your portfolio. Relying on price appreciation to fund retirement is risky.”

Dividends for Life
Cresap says he’s a huge believer in dividend growth over a lifetime, a concept called yield on cost. He says the portfolio should be viewed as an engine generating income over a 50-year period, or whatever period of time the client has left. “If you put money to work today and earn 3 percent off a balanced portfolio, and if the dividend income grows the way it should, after ten years the yield on your original cost could double to 6 percent,” he says, adding that in another decade, the yield could be 12 percent on the original cost.

Rising dividends for long periods of time have enormous effects on investment results. “Don’t look at the value of the portfolio, as it’s going to vary during a lifetime. Look at the dividend stream it generates, make sure it has potential to grow 6 or 7 percent a year, and you will be successful over a lifetime,” he says.

That means starting early in life and staying with it. “You can’t start at 70 – and expect to realize the full benefits of rising dividends,” he says. Cresap notes that older people often get to a point in life where they think they can’t live off investment income, so they buy high-yield securities, possibly junk bonds, and then put the whole thing at risk. “You don’t want to have to sell off assets to fund your lifestyle if your portfolio can’t generate sufficient income. You must stay completely focused on long term income growth, not price appreciation,” he warns. Discipline is needed, but for most people, it’s easy to build wealth if they stay the course over a lifetime.

For more information about Cresap, Inc., visit:


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