Why Dividend Stocks?

One of the biggest myths in investing is capital appreciation accounts for the largest part of investors’ gains.  This concept is pushed on the investing public each day, as the nightly news flashes the most prominent stock market indices including the Dow Jones Industrial Average & S&P 500.  When the anchor broadcasts a large market drop, the price level of the index is solely discussed.  I accept that the large market indices give an investor a sense of how the market is performing in general terms, but it profoundly leaves out a key element of investor returns; dividends.   Dividends, or cash payments to shareholders, account for a substantial part of a stock investor’s total return. In fact since 1926, dividends have accounted for more than 40% of the total return of the S&P 500 stock index. In the last decade (2000-2009), the S&P 500’s total return of -9% would have been a heftier loss of -24% had it not been for the 15% contribution from dividends.

History has shown that dividends have been a powerful source of total return in a diversified investment portfolio, especially during periods of market turbulence. In examining the prior eight decades of stock market performance (table 1.1), dividends often account for more than 2/3 of the total return (1930s, 1940s, 1970s, & 2000s).  If an investor avoided dividend paying stocks during these elongated time periods, most of the total gains would be lost. Dividend investing is the key element to wealth building.

DIVIDEND CONTRIBUTION OF S&P RETURN BY DECADE

Years

S&P 500

Price %

Change

Dividend

Contribution*

Cumulative

Total

Return

Dividends

% of Total

Return

Average

Payout

Ratio**

1930s

-41.9%

56.0%

14.1%

>100%

90.1%

1940s

34.8%

100.3%

135.0%

74.3%

59.4%

1950s

256.7%

180.0%

436.7%

41.2%

54.6%

1960s

53.7%

54.2%

107.9%

50.2%

56.0%

1970s

17.2%

59.1%

76.4%

77.4%

45.5%

1980s

227.4%

143.1%

370.5%

38.6%

48.6%

1990s

315.7%

117.1%

432.8%

27.0%

47.6%

2000s

-24.1%

15.0%

-9.1%

>100%

35.3%

2010s

27.9%

8.4%

36.3%

23.1%

28.4%

as of 12/31/12

 

Source: Strategas

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