Thomas Partners Investment Management (TPIM) recently analyzed market returns from 1986-2005. The strategy article notes:
It is interesting to note, however, that despite all the attention given to corporate earnings growth, well less than one half of the increase in portfolio values over that period can be attributed to the underlying earnings per share growth of the S&P 500 component companies! The balance, to the surprise of many investors, was due to increased Price/Earnings ratios ("P/E" ratios) and the reinvestment of dividend income.
Thomas Partners theorizes:
If "growth-hungry" boomers drove P/E’s higher in the past, it is logical to assume that "income-hungry" boomers will drive P/E’s lower in the future. First, growth will not be the dominant investment goal; income will likely dominate. Second, higher current yields (caused in part by lower P/E’s) will be needed to support boomer retirement lifestyles. As such, the P/E ratio expansion that contributed so handsomely to equity returns in 1986 to 2005 will likely reverse and inhibit price appreciation for years to come.
As noted in a prior post, up to this point, companies have favored stock buybacks to dividend payments. With the payout ratio on the S&P 500 at a historical low of 30%, companies have the capability to increase dividends that are paid to shareholders. It is believed as boomers move into their retirement years, they will prefer owning less volatile dividend paying stocks and will demand higher dividends in return.
Finally, as TPIM notes and I have mentioned in prior posts:
Dividends make a difference in any portfolio and more current yield, earlier, plus more dividend growth, later, can significantly enhance long-term total returns.
Before I touch on the interview, who or what is Eons. Eons is a site devoted to boomers. The site was started in mid 2006 by Jeff Taylor, the founder of Monster.com. Eons' mission statement:
Eons is a 50+ media company inspiring a generation of boomers and seniors to live the biggest life possible.
"One is that income is very difficult to get excited about in any sort of a short-term measurement period," Thomas says. A dividend is too small to have much impact on total returns.
"Even if you have stock that is yielding 4 percent, the dividend in one quarter is only returning 1 percent," he notes. In the same time period, the price of a stock can change 5, 10 or 15 percent in any direction - far more noticeable.
A second reason why the dividend growth strategy is not widely practiced is the nature of the stocks themselves.
"The kinds of stocks that pay dividends, and particularly those that pay increasing dividends, rarely capture the excitement of the short-term marketplace," says Thomas.
The dividend growth companies are the "steady eddies" of Wall Street - GE, MDU Resources, Procter & Gamble, McGraw Hill, to name a few.
"The market is a popularity contest in the short term," Thomas says. "And the last thing we want to be doing is always be buying the most popular kid on the block, because those things have a way of changing."
Equity Markets: 1986-2025
Thomas Partners Investment Management
Dividend Growth Portfolio: 'Steady Eddies' of Wall Street Drive Investment Strategy
By: Stephen Crowe