“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
John .D Rockefeller
I believe John D. Rockefeller said it best. Philosophically, dividend-paying companies tend to be reliable, sound investments for the long haul while participating in the current profits. For many years, dividends were the focus of investors. The era of the dot-com companies and the reduction in capital gains taxes ushered in a new approach to rewarding shareholders; with share-buyback plans as opposed to good old-fashioned dividends. In 2008 though, as the market swooned, dividend paying stocks of steadfast companies tended to perform better than those without dividends. Many investors viewed dividends as a sign of strength and punished those stocks that needed to cut or eliminate their dividend. Some financials were in the last category.
But in 2009, steady dividend-paying companies struggled to keep pace as speculative fare performed best. After that rally, many felt that the next cycle of the equity market would focus on those whose dividends are paid year over year, with increasing payouts. As briefly evidenced, dividends tend to come in and out of favor within market sentiment. We tend to view dividends as really never going out of style rather the market has a short memory of just what it has meant to returns over the years.
Dividends have been a major component of investment return over the long term. As observed, $1000 dollars invested in 1960 in the S&P 500 would have grown to over $72, 299 at the end of 2008. If you remove the dividend component, that same $1,000 dollars would have grown to only $15,082. 1
We continue to tilt our portfolios towards those securities with a focus on strong growing dividends. After the speculative rally of 2009, investors have once again retreated to basic value investing espoused by such sages as Warren Buffet and others. Without dividends, companies are really just promising something in the future. We at Fragasso Financial Advisors accept some promise, but want something as we wait it out as well.
1Source: Lipper Inc.
Past performance is no guarantee of future results. The market for all securities is subject to fluctuation such that upon sale an investor may lose principal. Indices, such as the S&P 500, are unmanaged and cannot be invested into directly.
Daniel Dingus is Managing Director and Chief Portfolio Strategist at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at blog@fragassoadvisors.com. Dan can also be reached for comment at 412-227-3200.