The current bull market celebrated its 10th birthday in March of 2019 and equity investors celebrated as the S&P 500 delivered returns north of 400% over the past 10 years. And it seems everyone wants to talk about growth stocks, IPOs and capital gains, but no one wants to talk about the other source of stock returns: dividends.
Might investors do well by paying attention to dividend-paying stocks this year?
With lower corporate earnings growth, low inflation and interest rate numbers, combined with the fact that dividend-payouts are expanding and, if the market slides, dividend-paying stocks might hold up better than others, dividends are worth at least a look.
Dividends are Important to Stock Returns Stock returns come from two sources: capital gains and dividends. A capital gain occurs when a stock you purchase appreciates in price. Dividends are payments made directly to shareholders and day-today changes of a stock’s price do not affect them.
Capital gains tend to be the most exciting portion of stock returns since stock prices fluctuate daily. But dividends have the potential to make a huge difference in your total return over time.
Return figures of indexes like the Standard & Poor’s 500 are often based on price changes alone (i.e. capital gains or losses). A better yardstick is total return, which includes the dividends that companies pay out.
Past 70 Years. The S&P 500 averaged a total return of 11.2% annually since 1950. With dividends removed the return falls to 7.7% per year
Past 60 Years. The S&P 500 averaged a total return of 9.9% annually since 1960. With dividends removed the return falls to 6.8% per year.
Past 50 Years. The S&P 500 averaged a total return of 10.4% annually since 1970. With dividends removed the return falls to 7.2% per year.
Past 40 Years. The S&P 500 averaged a total return of 11.5% annually since 1980. With dividends removed the return falls to 8.6% per year.
Past 30 Years. The S&P 500 averaged a total return of 9.8% annually since 1990. With dividends removed the return falls to 7.5% per year.
Past 20 Years. The S&P 500 averaged a total return of 5.6% annually since 2000. With dividends removed the return falls to 3.6% per year.
Past 10 Years. The S&P 500 averaged a total return of 12.7% annually since 2010. With dividends removed the return falls to 10.5% per year.
In other words, over the past 70 years, dividends made up around one-third of the total return of large U.S. stocks.
Even more impressively, since 1926, 45% of the S&P’s total return came from dividends.
That’s a huge difference and illustrates the impact of letting stock dividends compound over time.
*Keep in mind, these numbers are for educational purposes only and do not take into account taxes, investment costs and other fees.
Investing for Dividends Price performance of dividend-payers is cyclical. In the late 1990s, tech stocks which were “mostly nondividend paying” were in vogue. Come the tech bust, payers did much better in price terms, as investors sought income. The same phenomenon appeared in the bear market that followed the 2008 financial crisis. And of course, throughout much of the most recent 10-year bull market.
So far in 2019, the three best dividend-paying sectors are Basic Materials (4.96%), Financials (4.18%) and Utilities (3.96%).
Here are some ways you might profit from dividends:
Hold value investments. Adding value investments to your portfolio can increase your dividend income since they tend to offer more payouts than growth stocks. Keep in mind that, because growth and value tend to fall in and out of favor over time, a mix of both in your portfolio looks wise.
Don’t react to market swings. Instead of panicking out of stocks during downturns, focus on the opportunity to buy shares at a discount with your dividend income. And remember that you won’t receive the dividends if you sell your stocks during the market drop.
Be careful of equity-indexed products. Some advisors sell annuities and insurance that promise “equity returns” without losses. Unfortunately, many of these products use the price index, which leaves out dividends, so your long-term expected return is much lower than you might think.
A Final Dividend Thought There are a lot of reasons for investors to consider investing in dividend-paying stocks or mutual funds that invest in dividend-payers. But as with all asset classes, there are also downsides to think about too.
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” ~John D. Rockefeller