Dividend stocks do provide better returns!

I am always looking for proof points or research that provides support for my belief that dividend investing is a better way to invest. I’ve intuitively believed this to be correct, but I’ve never been able to find more definitive research. I recently stumbled across a couple of articles that I feel are starting to point me to that conclusion. 

 

Dividend Contribution to Total  Returns

In some research that was done by ISI group, it was found that dividends have a significant contribution to total return on the S&P 500. Total returns are defined as the sum of stock price return and dividend return.

ISI group examined the contribution of dividends to total return of the S&P 500 from 1930 through till 2011. Over the period, dividends provided a contribution of greater than 50% to total return of companies on the S&P 500 on average.

What was more significant however was that during periods of underperformance, the contribution of dividends to total return was significantly higher.  During the 1940′s and 1970′s, the contribution of dividend income to total return was closer to 80%.

Dividends provide a significant contribution to overall return that investors return from the stock market, more so in times of poor stock price returns.

Dividend growth stocks outperform all other categories 

Ned Davis Research examined the performance of dividend paying paying stocks against companies that cut their dividend and companies that did not pay a dividend.

Ned Davis considered the total return performance of dividend stocks versus non dividend stocks from the period of 1972 to 2011.

The research considered the total return performance of dividend growth companies, dividend payors (who paid but didn’t increase their dividend), companies who cut their dividend and companies that didn’t pay any dividends.

The research found the following:

- Companies that increased their dividends provide a return of 9.6% per annum

- Companies that paid a dividend but didn’t increase their dividend grew at 8.8% per annum

- Non dividend paying stocks grew at 1.7% per annum

- Companies that cut or eliminated their dividend grew at -0.5% per annum

- The S&P 500 provided a total return of 7.3% p.a over the period

So, interestingly enough, a person who had selectively picked S&P 500 dividend index stocks would have actually outperformed someone who held an S&P 500 based index fund by close to 2.3% per annum over close to 40 years.

Just how much a difference would that have made in terms of investment value? A $1000 investment in 1972 in the S&P 500 would have generated been worth $15,510 in 2011. A similar investment in the dividend growth stocks in the S&P 500 would have been grown to $35,450 in 2011.

While past performance is of course no guarantee of future performance, dividend stocks have shown the ability to generate significant total return over an extended period of time, even more so than their non dividend paying counterparts. With careful selection and monitoring, dividend stocks won’t just provide you with significant passive income, they can also help make you pretty wealth as well!

For additional details on the reports that were referenced, see the attached document from Ridgeworth Investments https://www.ridgeworth.com/assets/files/n9/dividend%20white%20paper.final.pdf.

Comments

  1. Martin says:

    I think it is a well known fact now that dividend paying stocks beat the market by a huge margin. Although there are a bunch of folks out there who do not believe it. The fact is you must reinvest the dividends to achieve this return.

    • Integrator says:

      True. Reinvestment of dividends really helps accelerate compounding and juice returns. The studies I looks at all assumed reinvestment of dividends in return calculations.

    • Just what I was going to mention, you have to re-invest…

      • Integrator says:

        Reinvestment really makes a large difference, however i’d argue its not much different to non dividend paying stocks where retained earnings are continuously reinvested in the business (instead of being paid out to shareholders), which should theoretically produce comparable rates of return if the businesses are of equivalent quality

  2. I’ve read some of these stats before in dividend stock books, but I think they are completely worth mentioning again! The evidence is overwhelming – if you’re going to pick any set of stocks to invest in, make it dividend paying stocks that increase each year.

  3. Investing in dividend paying stocks can provide the benefit of stable dividends. investors should always remember that only those companies are stable and more mature, that pay increasing dividend every year.

  4. Integrator says:

    Stock dividend, You raise a good point. Companies that can increase their dividends each year are certainly stable, but also have significant revenue and earnings growth power to able to continue to increase dividends year after year. It speaks to their sustainable competitive advantages to be able to do so.

  5. Dan Mac says:

    It’s pretty eye opening how just beating the market by a small percentage like 2% each year leaves one with so much more money! The trick is pulling off this feat which is by no means easy. Glad to see that my chosen strategy of dividend growth investing has historically been able to manage this. Here’s hoping this continues into the future and we can replicate these results in our own portfolios!

    • Integrator says:

      I agree Dan Mac. And while 2% may not seem to be much, when compounded over a large period with a growing asset base, thats huge. Any action that can be taken to incrementally increase effective return is well worth it in my view.

  6. Hi
    In my opinion in order to derive as much benefits as possible from dividend paying stocks, stock investors should acquire proper information with respect to the actual mode of distribution of the dividend. It should be noted that, by having dividends, stock price instability can be counteracted, as the dividends helps to have a sound influence on the returns that are derived from various kinds of stocks.
    For more details please visit this site:http://www.dailygainsletter.com/

  7. jessicaangelaes says:

    Hello,
    I think dividend paying stocks serves as better option to attain much profits, because of better returns. But do investment only in companies which are stable.

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