Saturday, May 03, 2008

Dividends Are A Critical Component Of Total Return

A significant benefit of focusing on a company's dividend practices is the fact dividends must be paid out of cash. Regardless of a firm's reported earnings based on Generally Accepted Accounting Principles (GAAP), a look at the cash flow statement provides insight into the true cash generation capability of a company.

In a recent dividend investing white paper (pdf) from Eaton Vance (EV), the company notes dividends have accounted for over 50% of a stock's return since the 1930s.

dividend contribution to total return since 1930The white paper shows:
Dividends have been a major component of investment return over the long-term. In fact, over the past 45 years, more than 50% of the annualized total return of the S&P 500 Index came from dividends.1 As the chart below shows, $1000 dollars invested in 1960 in the S&P 500 would have grown to over $114,718 today. But if you take away dividends, that same $1,000 dollars would be worth $24,517.2

Value of dividends over time since 19601Total return is annual price appreciation, or loss, plus dividends.
Source: Lipper Inc. Not meant to represent income from any Eaton Vance fund. S&P 500 Index is an unmanaged index commonly used as a measure of U.S. stock market performance. For illustrative purposes only. Past performance is no guarantee of future results. It is not possible to invest directly in an Index.
Lastly, over longer periods of time, data indicates the dividend growers and initiators out perform the other types of companies in the S&P 500 Index.

dividend growers and initiators outperformLastly, the white paper details the impact that legislative tax changes have had on the likelihood of companies to pay a dividend. Also, as the baby boomers begin entering retirement, paltry bond yields are enticing the baby boomers to look at dividend paying and dividend growth stocks.

Dividend Investing:
Favorable Long-Term Opportunities for Total Return and Income

Eaton Vance
By: Judith A. Saryan, CFA & Michael A. Allison, CFA
April 2008


MagicDiligence said...

Great post. This was a key point in Siegel's "Future for Investors" book as well. The compounding effect of reinvested dividends, especially when consistently raised every year, can earn investors 20% a year on a position, with no capital gains. It's sad how few people realize this.

Again, thanks and I'll be linking this in my weekly update post this week.


David Templeton, CFA said...


I am glad you enjoyed the article. Your reference to Jeremy Siegel's book is appropriate as well. I listed his book, Future for Investors, as a recommended read in a post I wrote in December 2006.