Dividend investors understand well the power of compound reinvestment of dividends. Total return each year is the sum of price change plus dividend yield, but that understates the long-term total return when reinvested dividends are considered.
The press has been all atwitter about the price level of the S&P 500 recently exceeding its 2007 peak. That's all well and good, but for those who have been in the market for a long-time, the value of their S&P 500 investment, as represented by SPY, broke the record last year.
Assuming that the investor began about 20 years ago in 1993 (a common starting point for many 55 to 65 year old investors today) that hypothetical investor reached a record in March of 2012 in a pre-tax account such as an IRA or 401-k. Alternatively, that investor reached a record in September of 2012 in a regular taxable account.
Here is a set of charts that shows the outcomes:
For the reinvestment calculations we used the 3-month Treasury rate as of each quarterly dividend, assuming the dividends were held on the side in a Treasury account (or a money market fund - something like that). For taxable accounts, we assumed a 33% overall tax rate on the dividend and the interest earned on the reinvested dividends.
Dividends are under reported by the press. They aren't flashy and don't sell well in TV programs laced with moving backgrounds, frenetic music, ambient trading floor noises, and staccato commentary made over the din.
However, the bottom line is that they add up. They provide comparatively dependable cash flows for those in the stage of life that depends on the portfolio to support lifestyle. They reduce the risk of outliving assets, because they eliminate or reduce the need to sell assets in down markets to meet obligations and requirements.
Just as dollar cost averaging-in creates advantage during the accumulation stage of life, dollar proceeds averaging-out creates disadvantage in the withdrawal stage of life.
In any event, dividend investors could have popped the champagne 6 to 9 months before the financial media announced a new S&P 500 record in March 2013.
Disclosure: QVM has positions in SPY as of the creation date of this article (April 3, 2013). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, but are compensated retroactively by Seeking Alpha based on readership of this specific article.
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