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Dividends and Dividend Growth Investing

Is dividend investing a safer and sounder investment strategy as compared to investing in purely growth stocks, or other stocks that don’t pay a dividend over an extensive period?


Dividends have always been an important part of the overall S&P 500 Index’s total return. In terms of the percentage contributions of dividends to the S&P 500 Index’s total return it is as follows: 1940s (67%), 1950s (30%), 1960s (44%), 1970s (73%), 1980s (28%), 1990s (16%), 2000s (negative total returns), 2010s (20%). From 1930s to 2018 S&P 500 dividends accounted for 43% of the total return for the index. In fact, during 1940s and 1970s dividends provided more than half of the total market’s returns. It appears that during bear markets dividends tend to provide a steady income stream offsetting the lower capital gains from SPX.


The normal progression of dividend stock investing is toward dividend growth investing. This is when an investor seeks to buy stocks of companies that have a solid track record (blue chip names) but also have a consistent record of increasing dividend payout on an annual basis. Many investors believe dividend growth stocks are solid long-term investments since stocks that are increasing their dividend payouts each year imply that these stocks are growing their bottom lines and have strong, steady cash flows.


What is interesting is dividend growth investing have consistently outperformed the stock market (SPX) and other type of stock investments, producing higher risk-adjusted returns over time. In recent years there have been a proliferation of dividend growth stock indexes, funds and ETFs. This is understandable as investors continue to search for an income stream in a historically low interest rate environment. Dividend growth investing remains a good strategy to implement as it allows an income investor to grow their income, and at the same time protect their purchasing power in an increasingly volatile market environment.


Although there are numerous dividend and dividend growth investment vehicles available today, we have included a list and the performances of some of the more popular and active ETFs available including the S&P 500 Dividend Aristocrats. This is a portfolio of S&P 500 names that have increased their annual dividend payouts for the last 25 consecutive years. A stock that can increase its dividend payout for 25 consecutive years or more implies that this is a profitable, solid, growth-oriented, and well-managed company. Isn’t this the primary reason why we invest in stocks?


10-year Treasury yield and S&P 500 dividend yield Source: Courtesy of StockCharts.com


Relative Performance vs SPX Source: Courtesy of StockCharts.com

Relative Performance vs SPX Ranked Source: Courtesy of StockCharts.com


Absolute Performance Source: Courtesy of StockCharts.com


Absolute Performance Ranked Source: Courtesy of StockCharts.com


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