Should I Care About Dividends?

By Geoff Schaefer

Geoff is a Wealth Advisor with Intergy Private Wealth. He writes for The Steadfast Fiduciary to help people live with an abundant heart, open mind, and boundless generosity.

October 20, 2022

How many times have we heard, “I invested in XYZ stock at $40 and it grew to $165!” We all have an acquaintance that loves sharing their investing wins (conveniently forgetting their regular losses, but I digress).  If you don’t, you’ve seen the Yahoo Finance articles charting the upward price trend of that week’s favorite stocks.  Most of these conversations focus on the price of the stocks alone making you think of investments as more of flea market transaction then actually taking ownership of a quality company.

A perk of ownership is that over time, as the business does well, you can take extra income from the profits.  If you own a small business you may call this a profit share or distribution. In publicly traded companies, this is called a dividend.

There is often little exciting or fancy about dividend paying companies: Exxon, AT&T, Apple, Coca Cola, The Home Depot, 3M and Pfizer. However, dividends can be indicative of quality within a company, the ability to sustain and grow them is a sign a particular business model is successful.  A study by the Hartford cited that, since 1960, 84% of the S&P 500’s total return can be attributed to reinvested dividends. So although overlooked, arguably the most powerful and sustainable means of compounded growth.  In a period of market declines, this is especially true because the dividends paid out typically get reinvested at the lower share price leading to better long term growth.

Price is a factor when investing, but the income produced by the investment cannot and should not be overlooked.  Income allows the investment to continue to work for you even when the price is temporarily out of favor.  Since 2005, the S&P 500’s Dividend yield has been competitive with treasury yields- see the chart below.  So, ownership of some of the highest quality names in the world paid you a level of income equal to that of the US Government? Not a bad spot to be in especially when you take into account the total return of the S&P 500 was 9.15% while 10 year treasuries averaged .99%.

Source: Ycharts

Now for some outlook. Since the financial crisis of 2008, corporations have more than tripled the amount of cash they carry on their balance sheets.  For a corporation, excess cash can be used for the acquisition, retirement of their debt, or returned to shareholders by dividend payments. Dividend recipients can be confident in the income with a record number of cash in reserve by US corporations.

Now, I am not suggesting to drop everything in your plan and buy the stocks with the highest yield.  I am also not suggesting forgoing the exciting growth opportunity in companies that are still focused on reinvesting and not yet paying a dividend.  What I hope to have highlighted here was the power of dividends within an overall investment and financial plan. Dividend income is part of a diversified strategy and historically, aid in portfolio performance. Having them does not remove risk from stocks, forgo the need for bonds and eliminate the purpose of cash.  It does provide powerful and sustainable reinvestment for a financial plan no matter the life stage or market level. Now a dividend strategy is not great BBQ talk.  So I’m sorry to tell you, when that one acquaintance feels the need to tell you their latest (and likely only) stock picking win, you’ll still just have to smile and nod, but know you have a financial plan that is working and you don’t even have to tell the world about it.

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