2-minute read
If I were Santa Claus, do you know what I’d give to every well-behaved boy and girl over the age of 60?
An Uber driver who takes the route they would go?
I’d give them a stock that pays a dividend.
Oh, Saint Nicholas, you shouldn’t have.
There are certain things that have surprised me during my years as a financial advisor. People’s devout connection with dividend paying stocks is one of them.
Remind me exactly what a dividend is again.
A dividend is a company sharing some of its profits with a shareholder in the form of a cash payout.[1]
And these dividend stocks have a high approval rating?
They’re up there with pizza and Adele. That’s why I’m afraid to show them this headline from Morningstar:
Uh oh. Tell Santa to turn that sleigh around.
To be fair, let’s put some perspective around this. Check out this chart:[2]
Help me out with what we’re looking at.
The total return of a stock is the return it provides in all forms, including capital appreciation and dividends. A stock may go from $10 to $20 in a year while paying you a $1 dividend. That $10 price appreciation plus the $1 dividend equals an investor’s total return.
So the chart is just showing that breakdown throughout the decades?
Exactly. You can see periods where dividends contributed a lot to the total return (e.g. 1970s) and periods where they did not (e.g. 1990s).
But since the 1990s it looks like dividends weren’t a big part of the equation, right?
I’d agree.
So we should essentially stop caring about dividends?[3]
Here’s where it gets tricky:[4]
So now we should care about dividends?
The blue line is the return of what’s called the Price-Only S&P 500. This includes just the price appreciation of the stocks, no dividends. The green line is the S&P 500 Total Return. This includes the price appreciation plus the reinvested dividends of the stocks.
And those reinvested dividends make that much of a difference even though they don’t account for much of the return?
Yes, the chart shows the value of dividends but it also shows the power of compounding. The dividends allow the money to compound at a larger base, leading to greater growth over time.
I still don’t know how much I should care about dividends.
Let me give you one final example to wrap it up. Here’s a chart of a well-known dividend paying stocks versus the S&P over the past 10 years:[5]
Explain.
The orange, purple, and yellow lines are the popular dividend paying stocks AT&T, Verizon, and Kraft Heinz, respectively. The blue line is the S&P 500.
Looks like those stocks got trampled by the S&P.
The message to investors is this: don’t get obsessed with dividend paying stocks, even if you’re retired without an income. The total return of a stock – price appreciation plus dividends – is the end all be all. A portfolio of exclusively dividend stocks may end poorly.
Understood. But I’ll still take a free stock if ol’ Saint Nick is dropping them down the chimney.
Merry Christmas my man!
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[1] Dividends can be paid in the form of additional shares as well, but more commonly in cash.
[2] Source: FactSet, J.P. Morgan Asset Management; Ibbotson, Standard & Poor’s, Guide to the Markets – US Data are as of December 31, 2017
[3] Keep in mind that stock buybacks were made legal in 1982. This presented another capital allocation option for company executives.
[4] Time period: 01/01/1990 – 12/01/2024
[5] Source: https://app.koyfin.com/charts/gm/et-n5kqqt