Dividend index yields almost 3 times more than the Ibovespa, but still loses a CDB – 11/27/2023 – From Grão to Grão

Investing with the goal of living off passive income is a common desire among investors. Many of them focus on stocks, particularly those that make up the IDIV – Dividend Paying Stock Index, which brings together companies known for having good shareholder remuneration. With the appeal of the stock market, many investors seeking passive income neglect an important alternative in the Brazilian market, fixed income.

Usually, we learn to invest through international literature. Out there, a moderate investor generally owns 50% or more in stocks. These build portfolios of dividend-paying shares so that their resources have their purchasing power restored, that is, inflation correction and a higher real gain.

They do this because the real yield, that is, the one above inflation on fixed income, is usually very low. In the US, the average real yield on 10-year bonds has been 1.45% per year over the last 25 years.

Therefore, the way out for American investors in the search for a higher real return is through stocks. Dividend payers are often chosen because they tend to be more mature companies, and therefore more conservative.

In Brazil, the fixed income market is different. This is a great advantage for you as an investor.

Let’s understand how the dividend index has performed since its creation in 2005 and whether the same issue of providing greater real gains is valid.

IDIV has returned 742.2% since 2005. If you invested R$120,000 that year, today you would have an amount of just over R$1 million.

In the same period, the Ibovespa appreciated by just 275.8%. Therefore, IDIV appreciated 2.69 times more than Ibovespa.

The appeal of dividend-paying shares in Brazil is no surprise.

Reinforcement, the returns above already include the reinvestment of dividends.

Question, among the returns below, would you be able to say which annual return would be equivalent to that of IDIV (742.2%) in 18 years:
a) IPCA+6.6% per year
b) IPCA+8.6% per year
c) IPCA+10.6% per year
d) IPCA+12.6% per year

Yes, even this impressive performance of IDIV could be surpassed by a simple CDB. This fact highlights the importance of fixed income in a Brazilian investor’s portfolio, especially for those seeking stability and predictability in their returns.

Despite being a very good result, IDIV’s return over the last 18 years was equivalent to that of a CDB with a return of IPCA+6.61% per year. The investor who invested in a CDB at IPCA+7% per year had even better results over this 18-year period.

I’m not against investing in shares. Investing in dividend-paying stocks offers the advantage of capital growth potential. However, these stocks are subject to market volatility and can be affected by economic and business factors.

In contrast, a CDB offers a fixed rate of return and is a safer investment, with a lower risk of loss.

With the high interest rates we have in Brazil at the moment, the choice of weights between shares and fixed income must be very well thought out.

I wouldn’t be surprised if those who invest in debentures, CRIs, CRAs exempt from income tax, with a return of IPCA+7% per year and with a term of 10 years have a better result than those who take risks in the stock market.

History shows that the balance of return for risk leans much more towards fixed income.

Finding the balance between risk and return and appropriately weighting assets is key to achieving long-term sustainability and financial independence.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

Speak directly to me via email.

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