Dividend Stocks’ Secret Weapon

The Hidden Appeal of Dividends – Time and Decreasing Risk

At this point, most savvy investors are aware of the research that has highlighted that stocks have historically returned about 9% per year, half of which has come from dividends. What surprises us is how many people focus on stocks on a 1-year basis and are always looking for something new to replace an investment that had a solid year. In our view, this type of thinking results in investors missing the greatest part of dividends; growth over time. Once we start considering this growth, the annual return can begin to weigh more heavily toward the dividend. Given enough time, the annual return from just the dividend on a stock can potentially exceed the total stock market average return of 9%.

Benjamin Franklin was impressed at how investments can increase at geometric rates if simply left alone, “Money makes money. And the money that money makes, makes money.” Einstein was once allegedly asked what was man’s greatest invention and famously quipped back, “Compound Interest.” Despite this hidden power, we routinely see a market that emphasizes trading a winning stock. The pitch is “well you made 15% this year on the stock including a 5% dividend, so let’s sell that after it had a nice run and buy a different stock.” What’s left out is that last year’s winner may have boosted the dividend, and you are now in a position to receive a 5.5% yield on your initial cost. Instead the new stock may have a 2% yield, so the investor is selling a 5.5% yield to buy a 2% yield even knowing that the historical average stock market return is 9%. Read the rest of the article here…