For years, I have spoken about the importance of dividends as a component of potentially increasing long-term wealth. Dividends are one of the tenants of our investment philosophy and one aspect of our strategies we pay particular attention. Dividends matter, a lot.
As a refresher, dividends are a result of corporations earning more money and their decision to return money to the equity owners of their company. As earning go up, typically so do dividends.
In planning for the future, I am very confident that stuff we buy will cost more in the future than it does now. Inflation has been a time constant. A bit of nostalgic history for you, just think back to when you were a kid. How much did a soda cost you? In the early 60’s, about 15 cents for a bottle of soda; with 3 cents allowed to return the bottle. You may have collected bottles for the return money. From then to now, the rise in the cost of a soda is a little more than 3%. There is “that” number again!
During the times of market volatility, it is easy to detract in our attention by price fluctuations. Especially as the media is incessant in reporting the moment by moment price declines. Sensationalism sells.
Market corrections are normal, bear markets end, but inflation over the long term doesn’t go down. I contend that inflation and spending are the aspects we must be cognizant and fearful of if we don’t plan, not short term volatility in price.
Since the things we buy are going to cost more in the future, what are the things we can invest in that will help us out and how can we position money to help combat rising costs? I mentioned one of our tenants in our investment philosophy are dividends. Equally important is the company’s ability to consistently rise dividends. It is the increasing rise in dividends, that can help us combat rising costs.
So during this time of price fluctuation, I would like to take a moment to reflect on something positive and longer term. If you look at the chart that follows, which separates price return and that with dividends reinvested in the S&P 500, the impact is substantial. (1)
Now you may be thinking the 9.5% per year S&P 500 total return over the past 27 years is due to a great economy and is in recent memory. For millennials, this is the only markets they have experienced – the rest is written about. But if you look back throughout history, this is in line with the stock market’s long-term returns going back to 1926, or back even further to 1871.(1)
To further illustrate the impact of compounding, the following graph illustrates this over a longer timeframe. From 1970, through the end of 2017, if you were to invest $10,000 and reinvest the dividends and not sell during times of market volatility or fear, the impact of dividends is about a million dollars. (3)
Through the doom and gloom of our current financial news cycle to the next reports of euphoria, something that remains consistent is the math. Compounding works; it just needs time and patience. I’ve written about the need for patience in prior writings, see Emerging Markets & Patience Go Hand-in-Hand.
As we manage our portfolios, we pay particular attention to dividends, their consistency and increases. One of our tenants is the phrase “Cash-flow is King.” Dividends are a symptom of a company’s ability to pay cash from earnings. In the end, one of the most important aspects of wealth is generating cash-flow.
In managing your finances, we have a similar mindset. Targeting cash-flow, which dividends are a part of, helps in meeting your spending needs. As cash-flow increases through time, then the day-to-day pricing of assets becomes less of a centerpiece.
For our clients, we will continue seek methods to grow income and look for long-term growth of capital.
If this philosophy resonates with you and would like to learn more, give us a call.
Sources & Disclosures
(1) Fritz Meyer January 2019 Research Slides
Professor Jeremy Siegel Stocks for the Long Run, first published in 1994.
Ibbotson, Standard and Poor’s, JP Morgan Asset Management. Data is as of December 31, 2017.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
All indices are unmanaged and may not be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing involves risk including loss of principal. No strategy, including rebalancing and diversification, assures success or protects against loss.
Past performance is not necessarily a reliable indicator for current and future performance.