One of the things that can make it easier for investors to make money in the stock market is that it is very easy to discount the contribution of dividends to the total returns of the investment. My motivation for writing this article came after I watched a commentator on CNBC refer to Johnson & Johnson as "dead money" after observing that the stock moved nowhere over the past five years, as the television showed a screen of Johnson & Johnson's seemingly stagnant stock price over the past five years. The problem with such superficial analysis is that it does not factor in the effects of dividends paid out over that period.
While I suspect most dividend investors are aware of the long-term beneficial effects of dividends over decades and incredibly long stretches of time, I think it can also be worthwhile to point out the effects of dividends over the medium-term. Below are three examples of what an investment return might appear to be by focusing on the change in stock price alone, and then I later reconciled that figure with an accurate assessment of total returns that reflects the dividends paid out as well.
Here are a couple of interesting examples. On December 14th, 2007, Johnson & Johnson (NYSE:JNJ) closed at $67.59. The company currently trades at $70.69. That may not seem like a whole lot happened over the course of tying up your capital for five years. It might look like a $10,000 investment only grew to $10,458. Of course, just focusing on the stock price alone would ignore the fact that Johnson & Johnson paid out a quarterly dividend that grew from shy of $0.40 to $0.61 per share over that time frame. When you include the dividends, you will see that owning Johnson & Johnson over that time period actually turned a $10,000 investment into $12,373. In just five years, an extra $2,000 got tacked onto that $10,000 investment from dividends alone.
In some cases, the payment of the dividend has been the difference between losing money and making money. On December 14th, 2007, Procter & Gamble (NYSE:PG) closed at $73.90. Five years later, the company trades at $69.93. Yikes. That investment has made you nominally poorer, right? Well, not quite. Thankfully, even despite its problems, Procter & Gamble has managed to grow its earnings and dividends satisfactorily since 2007. While it may superficially appear that a $10,000 investment in Procter & Gamble fell to $9,462, the truth is that the inclusion of dividends would actually indicate that a small profit has been made. If you count the dividends that got paid out along the way, a $10,000 investment in Procter & Gamble would have actually grown to a few dollars shy of $11,000. Spectacular returns? No. But acknowledging dividends is the difference between seemingly losing $500 and booking a $1,000 profit.
Dividends can even have a meaningful impact on companies that cut them, such as Pfizer (NYSE:PFE). Pfizer cut its quarterly dividend from $0.32 to $0.16, and has been gradually rebuilding the dividend since then, with the last quarterly dividend at $0.22 per share. Pfizer traded at $23.10 on December 14th, 2007. The company currently trades at $25.18. For five years of capital invested, not a whole lot of movement. Based on stock price change alone, it would appear that a $10,000 investment only grew to $10,904. Yet if you include the dividends, you will see that the $10,000 investment grew to $13,812. For a company that cut its dividend at one point along the way, that's quite a substantial difference.
Over a five-year time stretch, these contributions to total return brought on by the dividends can be quite nice. While focusing on the stock price alone might give the impression that Johnson & Johnson only grew 4-5% in total over the past five years, the inclusion of dividends will point out that the result is more like 24%. In the case of Procter & Gamble, it could be easy to assume that investors must have lost money just because the stock price today is a couple dollars below what it was five years ago. And in Pfizer's case, it could become easy to discount the contribution of the dividend altogether because it got cut in half at one point along the way. This is why dividend investors can often achieve satisfactory or better total returns without religiously focusing on the total returns. When you get 2-4% added to the value of your investment each year, it's easy to see how you can get a leg up over time. The medium-term results for these three companies demonstrate the importance of dividends to an investor's bottom-line results.
Disclosure: I am long JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.