The Long-Term View
Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1960, 69% of the total return of the S&P 500 Index1 can be attributed to reinvested dividends and the power of compounding, as illustrated in FIGURE 1.
Decade By Decade: How Dividends Impacted Returns
Looking at average stock performance over a longer time frame provides a more granular perspective. From 1930–2022, dividend income’s contribution to the total return of the S&P 500 Index averaged 41%. Looking at S&P 500 Index performance on a decade-by-decade basis shows how dividends’ contribution varied greatly from decade to decade.
FIGURE 4 summarizes the performance of the S&P 500 Index as a whole relative to each quintile over nearly nine decades. The second-quintile stocks outperformed the S&P 500 Index eight out of the 10 time periods (1930 to 2022), while first- and third-quintile stocks tied for second, beating the Index 67% of the time. Fourth- and fifth-quintile stocks lagged behind by a significant margin.
Based on the Ned Davis study, it’s clear that companies that don’t pay dividends or cut their dividends suffered negative consequences. In FIGURE 7, dividend non-payers and dividend cutters and eliminators (e.g., companies that completely eliminated their dividends) were more volatile (as measured by beta5 and standard deviation)6 and fared worse than companies that maintained their dividend policy.
Dividend Growth May Be a Key to Outperformance
Corporations that consistently grow their dividends have historically exhibited strong fundamentals, solid business plans, and a deep commitment to their shareholders.
The market environment is also supportive of dividends. A strong US economy has helped companies grow earnings and free cash flow, resulting in record levels of cash on corporate balance sheets. This excess cash should allow businesses with existing dividends to maintain, if not grow, their dividends. And while interest rates have risen in the past year, they’re still low by historical standards, which means dividend-paying stocks continue to offer attractive yields relative to many fixed-income asset classes.
Returns are volatile and unpredictable. Our dividend strategy produces reliable, dependable and growing income.
