Like the late comedian Rodney Dangerfield, who often complained, “I get no respect, I tell ya,” dividends are often underrated or even ignored by growth-oriented investors.
Stock Dividends Can't Get Any Respect
An often overlooked aspect of successful stock investing is the importance of dividends. In bull markets, investors tend to focus on price appreciation, meaning, they look solely for stocks that can increase in price. Like the late comedian Rodney Dangerfield, who often complained, “I get no respect, I tell ya,” dividends are often underrated or even ignored by growth-oriented investors.
In heady times like the late 1990s, investors feasted on stocks that would double or triple in a matter of months. Watching a stock go from $20 a share to $40 or $60 a share is exhilarating and makes for good cocktail party chatter. On the other hand, watching a stock sit at $20 a share for several years while you collect and reinvest a 3 percent dividend is rather boring and not worth sharing on the social circuit.
However, just like the old story about the tortoise and the hare, the slow and steady growth of dividends plays a very important role in making money grow over time.
The past 10 years is a great example of how dividends have helped improve the returns of an otherwise disappointing stock market. Here’s the data:
• For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 1.3 percent excluding reinvested dividends.
• For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 3.6 percent including reinvested dividends.
• As shown above, receiving dividends and reinvesting them added 2.3 percentage points per year to an investor’s return compared to the return generated by price appreciation alone of the underlying stocks in the S&P 500.
Sources: Morningstar, Yahoo! Finance
In today’s environment of low returns, finding a way to possibly eke out an extra 2.3 percentage points of return per year is attractive.
Over a longer period, receiving dividends and reinvesting them has accounted for one-third of the total return of the S&P 500 index over the past 80 years, according to Standard & Poor’s.
Standard & Poor’s also points out the following benefits of dividends:
• Dividends allow investors to capture the upside potential while providing some downside protection in the down markets.
• When bond yields are low, like they are now, dividend paying stocks might be a way to enhance an investor’s current income.
Just like any other investment, though, you need to figure out how dividends fit within your overall investment strategy. Are you looking for dividends to provide stability, income, or growth within your portfolio? Or, perhaps it’s some combination of all three.