The forgotten art of being paid to own stocks
When I tell people of retirement age that I am an investment manager, their eyes often glaze over. I dont blame them. Given the inconsistent reputation of the investment profession from both a financial and compliance standpoint, that is understandable. But when I mention that I am primarily a dividend investor, they seem to perk up. I think that is because investors in the Baby Boom generation and older remember when dividend investing was simple and fruitful. After all, dividends represented the majority of total equity investment returns for decades, until the 1980s came along and changed everything.
What do I mean by that? That decade was one-half of perhaps the most robust stock bull market ever. From 1982 through early 2000, the S&P 500 roared higher with great consistency. Sure, there were dips along the way, and there was even a more than 20% decline in a single day in October, 1987. But generally speaking, this was the era remembered for the joke about being able to throw a dart at the stock listings in the newspaper, invest in the stock it landed on, and make money
By comparison, investing money in stocks primarily so that you can be paid a stated amount every three months out of the companys profits sounded pretty boring. Today, to many investors, it still does. Thats in part because of an investment culture that has been convinced that other than an occasional bear market, the stock market is a one-way trade: buy now, wait several years, make a lot of money. If only it were that easy. But it is not. It just seems that way lately. And that is exactly when to start looking around the corner, so to speak. I think that when the current bull market fever subsides (or crashes), dividend investing will regain some of its lost sex appeal, especially to those who now want to live off their portfolio returns.
The table below shows how dividends as a portion of the total return in stocks took on a less significant role in the 1980s, and that role diminished further in the 1990s. The 2000s decade produced a negative total return for the S&P 500 (remember?) so the figures are not meaningful statistically.
Bloomberg, Guinness Atkinson Asset Management
And as for the current decade, which like the 1980s and 1990s has been largely devoid of major market declines. Using Ycharts.com data, I calculated that the total return of the S&P 500 Index from 12/31/09 9/8/17 has been about 159.6%. The dividend-only return during that time was 23.3%. That is in large part because the S&P 500 annual dividend yield started the decade around 3% in the wake of the financial crisis, and has drifted ever lower to its current level of about 1.9%. But the biggest reason is the fiesta that has occurred in equity returns consistently during this decade, dwarfing the dividend portion of the return.