Dividends were the forgotten 2nd cousin in the stock market throughout the 1990s. But with bull markets being far from certain, there is more interest (pun intended) in dividends than there has been for many years. This is especially true since the tax on those dividends was cut significantly last year. But dividends have always been important.
Here is a trick question. In 1932 the Dow Jones Industrial Average was at 41. It’s now over 10,000. That’s an amazing gain. But what would you rather have, that gain, or the compounded return of the dividends of those stocks? Of course since it’s a trick question, the answer is the dividends. On a relative basis the dividends would have a value over 40,000. That’s because at that time the average dividend on the DJIA was over 10%. We’re not liable to see 10% dividends again in our lifetimes. But even at lower levels dividends count for a lot. Over the last 100 years over 1/3 of the total return from stocks has been from those dividends.
Considering the caution of many investors now, dividends give you four levels of protection. First is the obvious one. You get some yield to cushion any loss. Second and related, a stock with a safe dividend will fall only so far. A stock with a 4% dividend today will not get cut in 1/2, as the dividend for new investors would be 8%. The third less obvious one is about corporate governance. It’s impossible to play a shell game and cook the books on money you have to actually pay to shareholders. It help keeps management honest. And fourth, it’s easy for management of your company to get complacent if they have a stack of cash laying around. But if they have to pay it out to shareholders, they have to replace it somehow, which is hopefully by growing the business.
I believe that dividends will be on the rise for many years now. And that’s all to the good of shareholders and the stock markets as a whole. It will be a powerful force in the investment world. Use that power to your advantage.