This Will Make You Rethink Your Dividend Investing Strategy
Insightful commentary on dividend investing. **JB**
By Eric Ervin, CEO Reality Shares
Much has been written about the importance of dividends in investing, and dividends have historically been a significant contributor to total return. As the following chart shows, nearly 40% of the total return of the S&P 500 can be attributed to reinvested dividends and the power of compounding.
Dec. 1994 through Sep. 2015. Source: Bloomberg. Past performance does not guarantee future results.
This is not just a domestic phenomenon. MSCI research found dividends were the largest contributor to global equity returns, accounting for 93% of total return over the 20-year period from Dec. 1994 through Sep. 2015.
Dec. 1994 through Sep. 2015. Source: MSCI. Past performance does not guarantee future results.
Don’t Fall for the Yield Trap
Unfortunately, when most people think about dividends, they are far too shortsighted. Dividend paying companies produce three, not two forms of return: stock price appreciation, current dividend yield, and something else far more valuable but often overlooked.
The common misconception among many dividend investors is to focus on high-yielding stocks. However, that’s where they get it wrong. Focusing on stocks that pay the highest current dividend yield is akin to telling a teenager to drop out of school to work for McDonald’s to earn a higher income. Wouldn’t they be better off INVESTING in their FUTURE so their income has the greatest potential to grow?
Think of high current yield like the Swiss cheese on the mousetrap. It looks enticing and tasty, and you might even eat heartily for a while, but rarely does it end well. In a study performed by Reality Shares using Bloomberg data, on average between 1992 and 2016, the companies with the highest dividend yields historically underperformed the broad equity market on a total return basis. Conversely, companies with the lowest dividend yields historically outperformed the broad equity market.
Jan. 1992 through Dec. 2016. Source: Bloomberg. Past performance does not guarantee future results.
Recall the MSCI study performed on the global stock market from 1994 to 2015 where dividends accounted for nearly 93% of the total return of the global stock market. If you break it down further, dividend yield accounted for only 29% of total return, whereas the growth of dividends represented nearly 65% of the performance over 20 years.
Dec. 1994 through Sep. 2015. Source: MSCI. Past performance does not guarantee future results.
