The Good News About Dividends That Will Surprise You

I run across a lot of charts and graphs on a daily basis. After all, as Chief Investment Strategist of High-Yield Investing, it comes with the territory.

Only a few of them really grab my attention. But I found one in a whitepaper that I like to trot out every year or so to share with anyone who questions whether income-paying stocks belong in their portfolio.

When I show people this chart, I don’t really have to argue why I’m a believer in dividend paying stocks anymore. This chart makes a compelling case all on its own.

Once you see it, you’ll understand. If you’re not taking advantage of dividend payers, you’re missing out — not only on the income, but serious long-term gains as well.

Don’t believe me? Here’s the proof…

As you can see from the chart above, share price appreciation would have turned a $10,000 investment in the S&P 500 in 1970 into $350,144 by 2019. That’s a handsome return by any accounting. But add reinvested dividends to the picture, and the same investment would have blossomed to $1.6 million, nearly five times as much.

In other words, reinvested dividends have accounted for 78% of the market’s total returns over the past half-century. That remarkable statistic doesn’t need any embellishment — it speaks for itself.

I’ll say it again: If you’re not investing in dividend stocks, then you’re missing out on the market’s strongest wealth-creating opportunities.

Dividends Are Great Again

The relative contribution of dividends has varied dramatically over the years. Back in the stagnant 1970s, quarterly distributions accounted for a hefty 73% of the market’s return. But in the high-growth 1990s, they represented a much smaller 16%.

I remember that period well. I was a financial advisor at the time, and dividend stocks (and funds) were a tough sell. Many of my clients considered them a quaint relic in the dawn of a new Millennium. Why get excited about a modest 3% to 4% annual income stream? Tech stocks could do that in a single day.

Instead, I got orders to buy high-fliers like JDS Uniphase, which rocketed past $1,200 per share in 1999. You may know the rest of the story. Like most others, it collapsed in the dot-com crash a year later and lost 99.9% of its value before rebranding. That was a painful lesson for many investors.

But we are once again in an era where dividends account for a meaningful chunk of the market’s performance. I think that will be even more true as we recover from the recent selloff brought on by the coronavirus epidemic. And if there’s one thing better than a steady paycheck every 90 days — it’s a growing one.

Dividend Raisers Crush The Market

Obviously, dividend hikes put more cash in our pockets almost immediately. We can see and measure the impact. But that might not even be the strongest argument for investing in these stocks.

As I’ve said before, a distribution increase sends a bullish message. After all, businesses don’t lift their commitments if they’re expecting earnings to falter. Higher dividends typically reflect an upbeat cash flow outlook, which often precedes a rising share price. So dividend raises not only boost our income, but they can also foreshadow potent capital gains.

How potent?

Well, we also have some good data on this subject courtesy of Ned Davis Research. Between 1972 and 2017, dividend-paying stocks outpaced non-payers with average annual returns of 9.25% vs. 2.61% for the non-payers. But a deeper look beneath the surface reveals a fascinating dichotomy.

The study separated all dividend payers into distinct groups: those raising payouts over the previous twelve months, those cutting or eliminating payouts, and those maintaining payouts with no change.

No surprise, dividend-cutters performed worst, and dividend-maintainers did better. But dividend-growers delivered market-crushing gains of 10.07% annually. That’s about 230 basis points ahead of the S&P 500 — with less volatility.

Closing Thoughts

If you’re already in the market and own a few dividend payers, then I’m probably not telling you anything you didn’t already know. Dividend hikes are good for investors; that isn’t exactly an Earth-shattering revelation. Still, it’s reassuring to attach cold-hard numbers to long-held beliefs.

But it’s still a good reminder of the power behind owning proven dividend raisers in your portfolio. That’s especially true in times like this. After all, the coronavirus pandemic (and the ensuing downturn caused by it) is revealing which companies are truly positioned to stand the test of time for longtime investors. And if this data is any indication of what the future will hold, the dividend raisers will be the winners.

That’s why I’m slowly putting money to work in our model portfolio over at High-Yield Investing. As I’ve written recently, I think we have a once-in-a-lifetime opportunity to snap up solid dividend-paying securities at a serious discount. We’re adding positions that are yielding 6%, 7%, 9%, and more that were previously paying much, much less than that. So not only are we locking in high yields, but we’ll be sitting on serious long-term gains once the dust settles.

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