The Importance of Dividends

From the most recent AMM Dividend Letter. Join our mailing list here.

Current Income to Owners:

Investors in common stocks own a pro-rata share of the companies in their portfolio and thus should think like owners. Many of our clients are business owners themselves, and once all expenses have been paid, and necessary funds have been retained for future growth, they typically pay a bonus or dividend to themselves. Large publicly traded companies effectively work the same way, they just have many more owners. While businesses may need to reinvest a portion of these profits for future growth initiatives, the remaining profits are available to pay out to shareholders in the form of dividends. While we don’t think companies should sacrifice growth just to pay a dividend, we do favor companies that have the ability to do both.

A History of Total Return*:

From 1926 through the end of 2012 stocks in the S&P 500 have annualized returns of 9.7% per year with 4.1% coming from dividends and 5.6% coming from capital appreciation. This ratio has varied over the years. In the 1940’s when stocks returned 9% per year, dividends accounted for wholly 2/3 of this return. In the lost decade of the 2000s, stocks in the S&P 500 annualized at negative .9% per year; however without the positive return of 1.8% provided by dividends, stocks would have lost -2.7% per year in the last decade. In all decades since 1926 dividends have provided an important component to a stock investor’s total return.

Not only do we like the long-term prospects of dividend paying companies, but we think the current environment is uniquely positioned to benefit companies with rising dividend prospects. Research from Pew suggests that approximately 10,000 baby boomers are retiring every day. With interest rates on high quality investment grade bonds at generationally low levels, retirees and those investing for retirement are looking for ways to increase their income in retirement. Blue chip dividend paying stocks that offer both income and growth potential appear well suited for this challenge.

* Data points in this section provided by: Standard & Poor’s, Ibbotson & J.P. Morgan Asset Management

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