Stock Dividends: Underrated Component of Investment Return

Many investors consider dividends a nice afterthought that boards dribble out to investors as a consolation prize. The reality is that dividends for the post-war decades have been a meaningful component of return. Dividends Count: The table below illustrates distributions as a component of total return for the decades since the ‘50’s. On average, approximately 50% of the average total return has been from dividends. Additionally, the average standard deviation for dividends has been 1.1% versus 6.5% for price appreciation. To further bolster the case for dividends is the fact that at least you get a positive return from dividends either turbo charging your appreciation or mitigating your loss. Red-Headed Stepson: The issue for dividends versus capital gains has been the relative tax imposed on each. Capital gains have always been the fair-haired boy in this comparison. Capital gains have historically been taxed favorably until the Tax Reform Act of 1986 when the tax rate was equalized. Dividend Emancipation: Despite emancipation of dividend yields, dividend yields continued to drop during the ‘90’s with the building of the “tech bubble” and in the most recent decade as a result of entertaining two stock market troughs. In many cases while stock buybacks are an alternative use of immediate shareholder value appreciation, they were used to fund aggressive option programs for executives.... Read more