Dividend Stocks Could Outperform over the Next 20 Years

I was digging around for information on companies that regularly raise their dividends and came across a document published by Mergent Inc. It has a rather impressive table showing how dividend-growth stocks have outperformed the S&P 500 Index over 1-, 3-, 5-, 10-, 15- and 20-year periods with less volatility.

The table below contains numbers for the 15- and 20-year periods (ending 2008). As can be seen, the dividend-growth approach beats the S&P 500 by about 1.5 percentage points a year in both periods. The one qualm is uncertainty over Mergent’s choice of S&P 500 Index. It would be appropriate to do the comparison with the total return S&P 500 yet I could not find in the document an explicit reference to using that version.

Regardless, a 13.1% average annual return in dividend growth stocks over 20 years is laudable in itself. So is the 8% average annual return over the past 15 years. And with dividend yields currently still elevated relative to historical norms in the aftermath of the financial crisis of 2008, the return from owning dividend-growth stocks over the next 15 to 20 years could potentially be even better than what is shown below.

Comments

[whidbey:]

Dividends and share PE come from the same cash source, earnings But they are allocated differently to share holders. Why would we believe that dividends are a significant criterion of choice in making investment decisions? We know dividends are perishable and often maintained as sweetener to temp shareholders. I want to believe, but I am suspicious.

Jul 01 04:33 PM

[swaps:]

Informative post. Some of my holdings have reduced or suspended dividends and they are the ones that dropped precipitously.
UN maintains dividend and its price is up slightly from where I bought it three years ago.
My stingy dividend gold stocks GG and KGC are surging.
I recall 20th century - now called something else - had a select fund that picked stocks that paid dividends, but it often trailed Ultra. I should compare those two funds now I guess to see if dividends gave Select a better return. In fact, I will.

Jul 02 09:37 AM

[David Van K...:]

whidbey, I don't think your comment that "Dividends and share PE come from the same cash source, earnings But they are allocated differently to share holders" is quite right. "Share PE" is not "allocated"

Investing for price appreciation is a significantly different strategy from investing for dividend collection (and perhaps re-investment). Dividends are "allocated" in the sense that the money is sent directly to you. (You are correct, that money comes from earnings.) But share price (which I think is what you mean by "share PE" is not "allocated" to anybody. Nothing is sent to anybody. Share price is determined by the market. Over long terms it often bears a strong correlation to earnings, whle over short terms share price is nearly random, and sometimes even inversely correlated to earnings.

You don't have to sell shares to receive dividends. Under a capital appreciation strategy, on the other hand, you don't actually get any $$ until you sell the shares...prior to then, any gain/loss is on paper only. For many companies, dividends are not "perishable" except under the most dire circumstances. Share price, though, is subject to the whims of the market and is extremely perishable.

So there are at least two reasons why dividends can be a significant factor in stock selection. One is that the whole point, if you are following a dividend strategy, is to get the dividends. The second is that, as pointed out in the main article, there has long been a correlation between dividends and share price performance. The late 90's (during the tech/telecom bubble and price growth that dwarfed dividend contribution to total performance) was an aberration.

Jul 02 11:45 AM

[Tack:]

For an even better strategy in these times, look for exchange-listed preferred shares of the same stocks that pay common-share dividends. Many of these issues are selling at amazing discounts to their historical typical prices.

Preferred stocks enjoy several advatanges, particularly applicable to this market and the unpredictable timing of any economic recovery:

1) Preferred dividends cannot be suspended or cut by a single penny unless the company also completely suspends common dividends. Therefore, as long as the shares are in a company in which you feel confident that at least some common dividend will be paid, then the entire preferred dividend will be paid in full and on time.

2) Preferred-dividend yields are at or near all time highs, even after the recent rallies, and these yield levels almost always far exceed the dividend yields on common shares, making them ideal income engines.

3) In these times common-share earnings and cash available for common-share dividends are much harder to predict, given the debate about V-, W- and L-shaped recoveries. This adds risk to predicting what levels of appreciation common shares may enjoy over the common few years and makes calcualtion of cash flows available for common-share dividends equally challenging. As preferred dividends are allocated prior to any calculation of common-share metrics, they are much better insulated from economic uncertainty.

4) With many preferred shares selling at huge discounts to par and to their historical pricing, not only do they offer superior yield characteristics, they offer atypical price appreciation potential. As the economy returns to normalcy, over whatever period, preferred stocks should resume trading at prices that more reflect bond-yield spreads than common-share risk.

5) Lastly, even in the worst events, by virtue of their senior position in the capital structure, preferred shares are superior to the claims of all common shares in any bankruptcy, reorganization or liquidation.

Jul 04 09:09 AM