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.