Many people in the investing world view dividend stocks as the province of "widows and orphans". Athough some of the time, it is an accusation. Fair enough. It is pretty hard to argue that these equities do not serve as a source of stability in bad markets. After researching a study of his own, Wharton professor Jeremy Siegel finds dividend stocks to be effective "bear market protectors".
What's particularly powerful about this method of investing is that not only do dividends provide a measure of protection in the form of a consistent payout, they act as a "return accelerator" when they are reinvested in during a bear markets. That is because the stocks are priced lower than they would be during a bull market, so the reinvested dividend is buying shares at a relatively low price. Those additional shares and the power of "dollar averaging" at work in turn accelerate the investor's performance when strong markets return. Do you now realize the benefits of dividend paying stocks?
For example, Siegel cites the fact that it was not until 1954 that the S&P 500 returned to the level of values it held prior to the Stock Market Crash of 1929. However, for those who reinvested their dividends through that period were 60% better off in 1954 than they would have been had the crash never happened. That's alone a very powerful accelerant.
Great, you may say, but what about during a bull markets? Well, there is one school of thought which says that preserving capital during bad markets in exchange for slower growth during good ones is a reasonable tradeoff. I would totally agree with that. Take, for instance, the stock investor who lost 60% in 2008, but later on gained profits of 103% in 2009. If an investor had put in $10,000 on January 1, 2008, he would have had $4,000 on December 31, 2008. After the spectacular stock appreciation in 2009, the investor would have ended the year at $8,120.
In reality, though, over long periods of time, in good markets and in bad, dividend stocks outperform the overall market. In Jeremy Siegel's study, he was surprised to learn that the highest yielding stocks, or those paying the highest dividends, generated between 2.5% and 4.5% higher returns than did the overall market.
In a 2003 article in the Financial Analysts Journal title Dividends and the Three Dwarfs, Robert D. Arnott demonstrates the importance of dividends to the long-term benefit of owning stock. Arnott points to numbers that detail stock returns from the 1802-2002. How's that for a long-term test? The average annual return for stocks over the 200-year period was 7.9%, of which dividends accounted for 5%. That's 64% of the return!
There are also other studies which cover other periods of time but still reach the same conclusion: high-yielding stocks perform better than the overall market and many of the blue chips dividend paying stocks have lower downside risk.
So, does dividends matter, you should know the answer by now.
