The Critical Role of Dividends in Stocks' Long-Term Total Return
At a time of low yields in the safer areas of the bond market, investors have increasingly turned to dividend-paying stocks to generate income. But dividends offer more than just income – if they’re reinvested, they represent a substantial portion of stocks’ long-term total return. The table below provides an idea of the importance of dividends in the stock market’s longer-term return. The first column shows the return from dividends, the second column the return from price change alone:
- 1930s: 5.4%, -5.3%
- 1940s: 6.0%, 3.0%
- 1950s: 5.1%, 13.6%
- 1960s: 3.3%, 4.4%
- 1970s: 4.2%, 1.6%%
- 1980s: 4.4%, 12.6%
- 1990s: 2.5%, 15.3%
- 2000s: 1.8%, -2.7%
Source: JP Morgan
While dividends were an important element of performance in the period from 1930-1979 and again in the 2000s, they played only a modest role in returns during the 1980s and 1990s. During this time, stocks were delivering such high price returns that dividend yield seemed like an unimportant consideration.
In fact, a company’s decision to pay out dividends was often seen as a sign that it had run out of opportunities to invest for future growth. This situation has begun to reverse in the past ten years, as investors are again paying more attention to the importance of dividends. A number of studies have shown the role of dividends in stocks’ total return:
- According to a Wall Street Journal article from September 15, 2011, titled “The Dividend as a Bulwark Against Global Economic Uncertainty,” dividend-paying stocks had returned 8.92% on average since 1982, compared with just 1.83% for non-dividend payers.
- Eagle Asset Management, in a June 2012 white paper titled "Dividends Deliver," noted: "From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks came from reinvesting dividends. Only three percent came from capital gains."
- John Bogle, writing on the website IndexUniverse.com, writes the following: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) – an amazing gap of $32 million. Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500.” In other words, the reinvestment of dividends accounted for almost all of the stocks’ long-term total return.
- Wharton Business School professor Jeremy Siegel – a famed value investor – notes that reinvesting dividends allows investors to take advantage of down markets by buying more shares at cheap prices, which “accelerates” the upside once the market begins to recover. Value Line, in a 2010 article titled, “Yielding to the Allure of Dividends,” cites the famous example of the market crash of 1929: “Investors unlucky enough to get in at the peak (and hang on) would have had to wait about 25 years for prices to make up their losses. Following the strategy of reinvesting dividends would have shortened the wait by roughly 10 years.”
- In the same article, Value Line cites another example of the importance of dividends, this one timelier: “The most recent decade’s performance provides a compelling example. Investors who bought into the S&P 500 at the start of 2000 and held on would, 10 years later, have found that the nominal value of their holdings had actually declined about 24%. … However, adhering to a discipline of reinvesting dividends … at the end of each year would have pared the loss to about 9%. Moreover, just in the past five years ending April 30, 2010, the S&P 500 returned a nominal average of 0.51% a year. Factoring in dividends lifted that to 2.63%, and this includes 2008 when the S&P had its worst drop since 1932.”
Recent performance trends show that investors need little, incentive to find high-yielding stocks, but these examples show that the important role of dividends is anything but a short-term phenomenon.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.