This Simple Chart Proves Just How Powerful Dividends Can Be…
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 $795,823 by 2021. That’s a handsome return by any accounting. But add reinvested dividends to the picture, and the same investment would have blossomed to $4.9 million.
In other words, reinvested dividends would have accounted for 84% of the market’s total returns over the past 61 years. 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 Back In Style…
Even without reinvesting, dividends by themselves have accounted for about 40% of the market’s total return since 1940. The relative contribution of dividends has varied dramatically over the years, of course. 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.
I think we could be entering era where dividends account for a meaningful chunk of the market’s performance. Corporate balance sheets hold record amounts of cash — and one of the best ways to reward shareholders is in the form of raising dividends. And if there’s one thing better than a steady paycheck every 90 days — it’s a growing one.
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.
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.
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 recent times. After all, the coronavirus pandemic revealed which companies were 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 continue to be on the lookout for dividend raisers over at High-Yield Investing. Not only are we locking in high yields now, but we’ll be sitting on serious long-term gains that will pay my subscribers more and more with each passing year.
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