As we get on in life, we become a bit more concerned about protecting what we’ve worked so hard to save. After all, the older we get, the less chance we have of earning back our nest egg if we gamble and lose.
That is one reason many of us feel more comfortable with investments in companies that not only earn real money, but pay good dividends to shareholders (rather than simply have all our holdings in so called growth companies that don’t pay dividends and expect us to live on the profit from increasing stock prices).
Investing in dividend producing companies is a good strategy backed up by statistics. From 1926 through this spring, for instance, almost half of the total return of the S&P 500 has come from dividends. Those of us in the dividend school have seen an average annual return during all of those years of 9.5%, with 4% of that from dividends. Not too shabby. It’s sort of like getting a rent check for the property we own.
Those numbers reflect the overall average in all markets, up and down. Most recently, we’ve seen and read about more down stock prices than up, so how does that play into things? Well, nobody likes to see a drop in their own portfolios, but I, for one, feel much better when I see that, even though the market may not want to pay me the full value of what I think a particular stock is worth right now, at least the company that issued that stock is paying me my share of its profits while I wait for better stock market times.
If I don’t need the money right now, I have the opportunity to reinvest the dividends right back into the company in the form of more stock, and, if the price of the stock is a bit lower due to overselling, even better. I get a good discount on what I believe is a great company and I pay for it with the money they gave me. Who couldn’t like that?
I can tell you lots of things about increasing shareholder value and complex investment strategies, but a simpler explanation is that, for those whose high-rolling days are past, or for those who don’t have the stomach for it, dividends have a nice way of smoothing out the bumps in the road. Moreover, if we reinvest those dividends in good times and bad, compound growth really makes a difference. For example, $100 invested in the S&P BMI World Index between 1989 and 2007 grew to $318.50 without dividends reinvested, but grew to $468.50 with dividend reinvestment. Imagine, the index improved about 47% more, just by reinvesting dividends.
With careful selection, monitoring and rebalancing, a portfolio comprised of dividend paying stocks could provide you with both income and growth, while taking less risk than most non-dividend growth-only stock portfolios. Given the uncertainty of the current stock market environment, wouldn’t an investor sleep better at night having a portfolio that offered substantial appreciation opportunities as well as a predictable stream of income?