The stock market has been turbulent the past month or so.
As a dividend growth investor, I usually ignore the ups and downs of the market. Stocks can go up, stocks can go down, but my dividends are paid on time, and increased too. Getting paid to hold is definitely a great strategy to stay invested and ignore the noise.
I recently saw some interesting research on dividends from Hartford Funds on the power of dividends.
Going back to 1960, they found that reinvested dividends accounted for 85% of historical stock market returns. Reinvesting those growing dividends into more stock definitely turbocharges the power of compounding.
A $10,000 investment in S&P 500 in 1960 turned to $982,000 by 2024. If you reinvested those dividends however, your total amounts to $6.42 Million. Compounding dividends matter.
It's fascinating to see how dividends impacted returns decade by decade.
Dividends have contributed roughly a third of returns on average per year. During a bull market, dividends have a lower contribution, and everyone seems to forget about them. During a bear market or a flat market however, dividends shine and provide staying power for the patient long-term investor.
While share prices can fluctuate up and down, and are difficult to forecast, dividends are much more stable, predictable and easier to rely on. This is why dividends are the perfect source of income for retirees. Plus they are tax-advantaged versus other sources of income and tend to grow above the rate of inflation over time as well.
You can see that during the 1970s and 2000s, when stock prices went largerly nowehere, dividends contributed a lions share of total returns for investors. During massive bull markets, dividends still contributed and held their own.
That being said, average dividends yields have been decreasing in the US. Notably, that's an end result of share prices rising too fast in the past 15 years, but also an increase in the way that companies distribute excess cashflow to shareholders. Notably, since the 1980s companies are "returning cash" increasingly through share buybacks and less through dividends.
This is a chart of S&P 500 dividend yields over the past 50 years:
You can see dividends yields are the lowest since late 2021. In late 2021 dividend yields were lowest since 2000..
You can see that since the 1990s, the amount of share buybacks has increased faster than dividends. However, dividends are much more stable and upwards moving up while buybacks are much more volatile and cyclical. Companies tend to do them when they are flush with cash, but share prices are higher, and tend to discontinue them when the share prices are low, but the outlook is murky.
The Hartford Funds also found out that higher yielding companies tended to deliver great performance over the past 90+years:
That's definitely fascinating, and interesting to observe on a decade-by-decade basis.
Last but not least, it's fascinating to observe the performance of dividend growth stocks. Those are the companies that tend to raise dividends to shareholders.
Long-time readers know the research from Ned David Research, which shows that dividend growth stocks rock, relative to companies that do not pay dividends, those that cut dividends and those that have high yields.
As far as the future is concerned, I believe US Equities will likely keep growing earnings over time, which would fuel dividend increases over time as well. This would likely lead to growth in share prices as well, although those do tend to oscilate up and down, above and below any estimates of intrinsic value. I do believe one needs to be careful about what they buy, as not every company can be safely bought and held. Plus, you need to evaluate valuation as even the best company in the world is not worth massively overpaying for. If you do, you may not make much in terms of money, even if you were right about the fundamentals.
