No. of Recommendations: 42
" That’s no anomaly. From 1973 through the end of last year, companies that grew or initiated dividends returned an average of 10.2% a year, versus 4.3% for nonpayers and negative returns for dividend cutters and quitters, according to data compiled by Hartford Funds. Since 1960, dividends have contributed 85% of the S&P 500’s total returns, such is the long-term power of compounding.
This statement is false. Please ignore it.
The way the study was done, you have to know in advance which firms were going to cut their dividends, right?
If you know the future, there are much easier ways to get rich than buying the ones that are going to increase their dividends in future : )
If you consider only what is knowable in advance, comparing dividend payers and non-dividend-payers is basically a wash. You get one group or the other pulling ahead a tiny bit depending on the precise date range you look at and how often you reconstitute the portfolio, but it's basically a tie within rounding error. Which makes sense: if there were a (true) conventional wisdom that one easily identified group reliably outperformed the other over time (as opposed to merely cyclically), investors would buy the outperforming group, bidding up the cost of entry and erasing the advantage for subsequent investors. There is famously no such thing as an easy free lunch.
Here is an example date range:
Among the largest 1000 US-domiciled firms (in effect the Russell 1000), in the 20 years 2005-2024:
Dividend payers, defined as those expected in advance to pay a dividend in the coming year: CAGR 10.06%/year.
Those not expected to pay a dividend in the coming year: CAGR 10.75%/year
Within the dividend paying group, the half with the higher expected dividend yields as a function of purchase price underperformed the half with the lower expected yields.
In this particular date range the no-dividend crew came out ahead, but as mentioned, it depends on the date range you pick. It's usually a tie, or close to it.
Note, the first figure for dividend stocks assumes "dividend reinvestment" calculated the usual way. i.e., it assumes you could and would re-invest dividends without tax or transaction or borrowing costs at market close on the ex-dividend date (which you can't). So the figure is an exaggeration.
It's worth noting that, unsurprisingly, the fraction of total return coming from dividends was higher in the deep past when dividend yields were very much higher. The average dividend yield of the S&P 500 and its predecessors in (say) the 1950s was 4.88%, versus 1.53% in the 2020s so far. Different starting situations mean different outcomes. Phrased another way: if your portfolio is yielding a 2% dividend rising with inflation and you're expecting a total return of (say) inflation + 6.5%/year, dividends are necessarily going to provide less than a third of your total returns if you meet your return goal. Not 85%.
Jim
