‘I became known as the income guy’

Dave Scranton, founder of Sound Income Group, remembers the day he made a critical shift in his investment strategy. It was a move that would make Scranton a sought-after mentor in retirement income and lay the foundation for three businesses.

“At the beginning of 1999, the stock market was at a record high, with price-to-earnings ratios around 40 across the S&P 500,” he says. “From my studies of market history, I knew that the market would pull back for a long time, aka crash. It took until the end of 2012 for the market to recover.”

This foresight led him to protect clients near retirement or in retirement by transitioning to income-generating investments from the traditional growth-focused model.

The move to income specialization

Scranton’s decision to specialize in income-generating investments was driven by his desire to safeguard his clients’ wealth during volatile market periods. Initially, his portfolio allocations focused on bonds, preferred stocks, and REITs.

What happened after he pivoted to income-generating assets was “amazing.”

“My personal income literally went up tenfold in seven years,” Scranton recalls. His focused expertise quickly gained recognition, and clients and advisors seeking an income-generating approach for clients near or in retirement began to flock to him.

“People started to say, ‘If you want growth, go to Shearson Lehman or AG Edwards. If you want income, go see Dave Scranton.’ I became known as the income guy.”

As Scranton’s reputation and success grew, so did his range of income-generating assets. “We started with bonds, preferred stocks, and REITs. Over time, we added business development companies (BDCs) and high-dividend common stock strategies,” he notes. This diversification allowed him to cater to a broader range of client needs and market conditions.

Meeting client needs: then and now

Reflecting on how his income-focused approach has shaped his advice today, Scranton emphasizes the growing demand for retirement income among aging baby boomers. “In 1999, the oldest baby boomer was 53, and the youngest was 35. Not a lot of people were ready for income yet. But as I stuck with that niche, people aged. The youngest baby boomer is now 59, and they want income now or in the near term, with Generation Xers right behind them.”

Scranton believes that investing for income can be particularly effective, offering higher income, reduced volatility, and potentially more significant returns. “Investing for income can be, in some ways, the holy grail for many clients,” he says. “Think about what people want. You can’t point to a 25-year-old who doesn’t want more income, more total return, and less risk. Everybody wants those things.”

According to Scranton, one key advantage of investing for income is the ability to mitigate market volatility. "Income provides income, but it also lowers volatility. If you go from growth stocks to high-dividend value stocks, you lower your volatility. If you move from high-dividend value stocks to bonds and preferred stocks, you lower your volatility again," he explains.

The power of dividends

Scranton highlights the significant role of dividends in enhancing returns, especially during market downturns. "When I was doing my CFA studies, I read many academic articles stating that dividends comprise roughly 40% of the stock market's return. Over the last 25 years, dividends have averaged about 1.5%, certainly under 2%. So if the market average is 10% total return and dividends are 1.5% or 2%, dividends should comprise 15 to 20% of the market return, not 40%. Why 40%? Because dividends reinvested during market dips accentuate dollar cost averaging, allowing you to buy more shares."

To illustrate, Scranton refers to the period from 2000 to 2012. "Imagine you had a common stock portfolio with a 4% dividend. While it took growth investors 13 years to get back to January 2000 levels, if you reinvested a 4% dividend for 13 years, you would have purchased 52% more shares. In reality, you would have purchased more like 70% or 80% more shares because market dips allowed you to buy more shares. So, instead of just breaking even, your high-dividend investor was up 70% to 80%."

Adapting to demographic and technological changes

Scranton acknowledges the changing financial planning landscape, driven by demographic shifts and technological advancements. "Defined benefit plans and pension plans have gone the way of the cuckoo bird, and the stability of Social Security is uncertain. The need for income is greater than ever," he asserts.

Scranton also sees the role of technology in shaping the future of financial advisory services by providing more transparency and communication channels. Clients, he says, want to know more than a quarterly statement. "Advisors need to give people more online access to information and keep in touch with clients, letting them know why they're making changes and what's happening. But I have zero fear of technology replacing financial advisors. The robo-advisor might be appealing when you're young and have a few bucks, but as people amass more money, they want to work with a human advisor."