The past 15 months have been volatile. Almost every category of stocks is down: large, medium and small caps, growth and value stocks, international stocks. But one category has held up better than the rest: dividend payers!
But this is nothing new and should be common knowledge. The top-performing stocks of the last 30 years are steady dividend payers like Coca-Cola, Altria, UnitedHealth, Mastercard, Visa, Home Depot, JPMorgan Chase & Co., Exxon Mobil, Procter & Gamble, Johnson & Johnson, Walmart and Microsoft. But investors consider these stocks as boring. When it comes to the stock market, most investors prefer glamour and a hot story. That’s not good because contrary to most investors belief, startling innovation is less successful as we think. In fact, 80% of new businesses fail in the first 5 years. Real profits for long term investors are made with steady businesses paying regular dividends. And this without the extreme volatility of hypergrowth stocks.
So, if you are looking for growth, income and safety, invest in dividend stocks. This fact is proven by Dr. Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania. His research of the performance of various asset classes over the last 200 years, including all types of stocks, bonds, cash and precious metals concluded that high-dividend paying stocks have outperformed the market by a wide margin over the long term. It also demonstrates that even during market declines, dividend-paying stocks hold up better than non-dividend-paying stocks and often, against the trend, rise in value. The reason? They are mostly mature, profitable companies with stable outlooks, plenty of cash and long-term staying power.
It is astonishing that investors are willing to lend money to the U.S. Treasury for the next 10 years at around 3%. This is not a smart investment because it almost guarantees a negative, real return, after inflation and paid taxes. A much better investment is a diversified portfolio of dividend-paying stocks. Over the nine decades through 2021, dividends contributed 40% of the U.S. stock market’s return, according to Hartford Funds. Sometimes it was much more. During the 1970s, for example, dividends generated 73% of returns.
Today dividend payers represent a historic opportunity. Not only are companies loaded with cash, but pay outs are less than 1/3 of profits, a historic low. But the dividend payments alone won’t make you rich but they will rise over time and reinvested you will quickly feel the effect of compounding returns. It is like a snowball rolling downhill. Already Albert Einstein understood the magic of compounding. He famously stated that money compounding “is the most powerful force in the universe.”
Sven Franssen