In today’s installment of our May Edu-Blogs, I want to talk to you about the importance of dividends. In 2022, the Standard & Poor's 500-Stock Index experienced a major bear market, declining around 25% from January to October, stabilizing slightly, and ending the year down just a bit less than 20%. However, as you know, a stock’s price isn’t the only way it can contribute to the long-term return of your portfolio, dividends if paid, are another factor.
Let’s go back to 2022 and the S&P 500. The cash dividends of the portfolio actually increased just shy of 11% from the previous year. Why is this important? Because cash dividends are paid to stockholders, they can then choose to take them out as cash or reinvest them in more company shares. If you plan to retire soon or are already in retirement, this should be at the forefront of your mind, as dividends make up an important component of retiree income.
History shows that dividends and company earnings have increased over the last 50 years. And the fact is that inflation and other economic difficulties have not stopped the growth of dividends. Sometimes we forget this simple but all-important fact. And even though the Consumer Price Index increased 6.4 times from December 1973 to December 2022, the S&P 500's cash dividend increased three times more than the cost of living. That means that if you were in retirement, your income stream may have outpaced the rate of inflation if it relied on cash dividend disbursements. Even with inflation as bad as it has been, your income would likely be up because of your dividends.
I hope this clarifies my point, despite the fact that we don’t often hear too much about dividends. As Jeremy J. Siegel, author of the seminal work on equity investing Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, wrote, “A 6.5% annual real return, which includes reinvested dividends, will nearly double the purchasing power of your stock portfolio every decade. If inflation stays within the 2 to 3 percent range, nominal stock returns will be 9 percent per year, doubling your stock portfolio's money value every eight years.”
This is not only really important to know, but it is also some good news despite the fact that something as mundane as earning dividends and significant growth doesn’t often come out of the mouths of the incessant. Good news? What’s that?
And there’s even more good news because even when stocks are in bear market territory, dividends can increase, another critical factor for long-term equity investors. And if you are saving for retirement, this is when you want to reinvest those dividends in additional shares of the companies you own, which will help you accumulate more for retirement. This is a little trick called compounding, which I have no doubts you are aware of. In fact, this is such a powerful tool that investors who reinvest their dividends will make more money in bear markets without even focusing on it because you are investing in more shares that will be worth more when the market climbs out of bear territory every time dividends are paid. Not bad!
So, I’ll leave you with this - dividends are a crucial aspect of the stock market, and we shouldn’t overlook their power as an investment or income tool. Even in a bear market, the growth of dividends can provide a significant return on investment in the long term.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.