Risk vs. Reward: Higher Risk Does Not Equal Higher Returns for Investors

One of my favorite sites about a dividend-based investing approach is Dividend Based Investing. I was perusing his site today and came across something I had not seen before concerning risk and reward in the context of investing. I think this applies to our dividend based strategy, more than any other investing concept. The statement comes from an article written by Mark Hulbert at MarketWatch. The page is stored at Dividend Based Investing site.

Mark Hulbert runs an investment newsletter called the The Hulbert Financial Digest which is a rating service that tracks the performance of stock and mutual fund investment letter performance. From his experience in running his newsletter, he has noticed the following:

The majority of the very risky newsletters do not produce returns that are even as good as their conservative brethren – must less the significantly higher returns needed to compensate followers for the many sleepless nights

In essense, as investors it is our jobs to get the highest returns with the lowest amount of risk humanly possible. A return of 12% with zero risk on Investment A is better than Investment B’s 15% return with 5% more risk than Investment A. As Mark has pointed out, more risk does not necessarily mean higher returns. The real kicker however, is that to compensate an investor for the added risk he/she is taking then one should expect a much higher rate of return. This did not happen during his analysis period.

In my opinion and experience, investing in dividend stocks provides a nice balance between risk and reward. Stocks that have consistently increased their dividends tend to be less volatile and reward investors well with much lower risk than investing in small-cap stocks. Of course their is still risk associated with dividend based investing, but if you construct a well balanced and truly diversified group of stocks then your risk level should be minimized.