70% of ALL Stock Market Gains Come From This...
InvestorEducation / Dividends Jun 01, 2009 - 01:37 AM GMTBy: Graham_Summers
Are you getting paid?
For much of the 20th century, investors bought stocks for one reason: dividends. In fact, before the SEC act of 1934 was passed, dividends were THE ONLY reason you’d buy a stock.
Prior to this, there was no such thing as accounting standards or SEC filings AT ALL. You literally had no idea if a company even MADE money. So the only reason you’d even consider putting your money into the stock market was because a company paid out a dividend (you got some kind of return).
Dividend or income investing continued to dominate the investment landscape after the SEC Act of 1934 was implemented. In fact, many of the most popular valuation methods used for valuing stocks involved dividends (stock dividends vs. yield on Treasuries, Price to Dividend, etc.). And it wasn’t until investors became “growth” obsessed in the last 30 years (thanks to the mega-bull market from 1982-2001) that Earnings superseded Dividends in terms of importance.
Which is a HUGE mistake.
It’s common knowledge that stocks return an average of 6% a year (at least going back to 1900). However, Elroy Dimson, Paul Marsh and Mike Staunton from the London Business School recently revealed that when you remove dividends, stocks’ gains drop to a mere 1.7% a year (even lower than the return from long-term Treasury bonds over the same period).
Put another way, dividends account for 70% of the average US stock returns since 1900. When you remove dividends, stocks actually offer LESS reward and MORE risk than bonds. If you’d invested $1 in stocks in 1900, you’d have made $582 with reinvested dividends adjusted for inflation vs. a mere $6 from price appreciation.
Like I said before, dividends are and should be one of the most important components of any investment strategy. The benefits are numerous (as if the fact they’ve produced MOST stock market gains over the last 100 years isn’t reason enough).
For starters, collecting a dividend insures you get paid for investing in a company. The world of investing today is largely one of uncertainty. Dividends offer a degree of certainty in the sense that you’re definitely getting something for putting your money to work.
Dividends also act as a cushion against market drops. If a company’s share price falls 10% and pays out 5% in dividends, you’ve actually only wiped out 5% of your capital instead of the full 10% you’d have lost WITHOUT a dividend.
Dividends also limit the amount of stupidity a company’s CEO or management can achieve when it comes to mergers and acquisitions. It’s no coincidence that worldwide merger and acquisition (M&A) volume hit a record $4.8 trillion dollars the same year (2007) that cash pay-outs to shareholders as a percentage of profits hit an all-time low of 31% (companies were spending their earnings on dumb deals instead of increasing shareholder returns).
Dividends insure that at least SOME of the profits go to shareholders. Ideally a company should have some kind of legal requirement to distribute profits (like REITs, or MLPs) thus insuring its management won’t blow profits on dumb deals. Which means more money going into your account, and less money going to Wall Street to broker deals that offer no benefit to anyone other than investment bankers.
Make no mistake, dividends are crucial in any investment environment (especially today’s volatile market). I’ll detail the most critical issue currently facing dividend investing in tomorrow’s essay. Make sure you read check in as this information could very well SAVE your portfolio from unpleasant surprises when it comes to collecting cash payouts in 2009.
Good Investing!
Graham Summers
PS. I’ve prepared a FREE Special Report detailing three investments that will soar when the Second Round of the Financial Crisis hits. I call it the Financial Crisis Round Two Survival Kit. Swing by www.gainspainscapital.com/roundtwo.html to pick up your free copy today.
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
© 2009 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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