For more than 80 years, stocks have been paying dividends that have provided an important boost to the overall return of stocks. Dividends often get downplayed but they historically have been very significant. Over the last 82 years of history in the stock market, an average of 35% of monthly returns from stocks have come from dividends, a number much higher than most would guess. Twice there have been entire decades where the dividends paid to shareholders of stocks made up more than 50% of the average monthly return.
Companies have a choice about how much of a dividend they want to pay and many companies have cut their dividends during the recession. It takes steady earnings to pay dividends at all and a stable dividend is a sign of a stable company to invest in. As the economy recovers, dividends are likely to be in favor and many companies will start to nudge their dividend payments higher again.
Downside Protection: For any investors in the stock market over the past few years, the idea of reducing risk and protecting their portfolios from feeling every drop in a stock’s price is appealing. There is a sense among some investors that dividend paying stocks don’t grow like higher octane growth stocks, but over the past 8 years high dividend payers have captured 82% of the upside of the market but only 23% of the downside, participating in rallies and protecting from downturns.
Compounding Power of Dividend Income: Almost any institution that allows an investor to trade stocks has a dividend reinvestment program and that’s where the true power of dividends can make a big difference. To put it in perspective, if you had invested one dollar in the S&P 500 in 1930 without reinvesting dividends, your investment would currently be worth $42. This is a nice return, but if you had reinvested dividends along the way, that dollar would now be worth $1052!
Dividends Provide Investment Income: If you’ve seen interest rates being paid to owners of CD’s, Treasury Bonds, corporate bonds, and other fixed income instruments, it’s not nearly as easy to live on income from investments as it used to be, even for wealthy investors. With millions of baby boomers entering retirement each year, replacing the income from not working and earning a paycheck is essential and the fact is that dividends are counted on as a source of income by many investors.
While dividends can do a lot of great things to enhance the returns of an investment portfolio, it’s important to realize that dividend paying stocks are not bulletproof. Washington Mutual always was noted for paying a great dividend and the stock became worthless overnight. General Electric increased their dividend annually for decades before the recession caused them to cut their dividend as the stock price fell by more than 80% in an 18 month period of time. There will always be risk in the stock market, but dividend paying stocks can help to mitigate at least some of that risk and provide valuable benefits to stock portfolios.
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