Market Beat: The importance of cash dividends
Div idends are payments made to shareholders. Most dividends are paid out on a regular basis, like quarterly, semi-annually or annually. Sometimes, corporations will also declare special dividends that are a one-time occurrence.
Dividend payments are not guaranteed by the company but can be raised, lowered or terminated at any time by the corporation.
The total return on a stock investment is defined as the price return, plus the dividend yield. To get total return, you determine how much the price of your stock changed over a given timeframe, and then add in the dividends you received over that period.
The dividends are a very important component of investment return, especially over longer timeframes. Dividends have been responsible for over 40 percent of the return on major US stock indexes over the long haul.
Stocks that pay good dividends have also been good performers. Standard & Poor’s, the company that developed the S&P 500 Index, also has an index known as the Dividend Aristocrats.
The stocks in the Dividend Aristocrat Index are selected from the broad market based on their history of raising and increasing dividends.
The S&P Dividend Aristocrats have outperformed the S&P 500 over the last three-, five- and 10-year periods.
In today’s record-low interest rate environment, dividend-paying stocks have played an important role in the portfolios of many income investors. With the benchmark 10-year Treasury bond yielding less than 2 percent recently, stocks that pay a 3 percent or 4 percent dividend seem attractive.
Dividend-paying stocks aren’t just for income investors; long-term investors seeking growth can benefit from the effect of dividend increases.
It has been possible to purchase a stock in the past with a yield of, say 2 percent, and see the yield relative to your purchase price double or triple over a long time period.
One good example is the DIA — the ETF that tracks the Dow Jones Industrial Average. If you had purchased the DIA in January of 1998, your dividend yield at the time would have been a little less than 2 percent.
Had you held the fund until now, your realized dividends in 2014 would have yielded you about 4.4 percent based on your original cost.
While the price of the Dow more than doubled over that time frame, your dividend yield also increased by more than double.
Investing for dividend growth can produce good long-term results.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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