The Critical Role of Dividends in Stocks' Long-Term Total Return

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At a time of low yields in the safer areas of the bond market, investors have increasingly turned to dividend-paying stocks to generate incomeDividends offer more than just income; if they’re reinvested, they represent a substantial portion of stocks’ long-term total return. The returns below provide an idea of the importance of dividends in the stock market’s longer-term return. The first number is the return from dividends, the second number is the return from price change alone:

  • 1930s: 5.4%, -5.3%
  • 1940s: 6.0%, 3.0%
  • 1950s: 5.1%, 13.6%
  • 1960s: 3.3%, 4.4%
  • 1970s: 4.2%, 1.6%
  • 1980s: 4.4%, 12.6%
  • 1990s: 2.5%, 15.3%
  • 2000s: 1.8%, -2.7%

While dividends were an important element of performance in the period from 1930–1979 and again in the 2000s, they played only a modest role in returns during the 1980s and 1990s. During this time, stocks were delivering such high price returns that dividend yield seemed like an unimportant consideration. 

A company’s decision to pay out dividends was often seen as a sign that it had run out of opportunities to invest for future growth. This situation has begun to reverse in the past ten years, as investors are again paying more attention to the importance of dividends. 

Long-Term Total Return

According to a Wall Street Journal article from September 15, 2011, titled “The Dividend as a Bulwark Against Global Economic Uncertainty,” dividend-paying stocks had returned 8.92% on average since 1982, compared with just 1.83% for non-dividend payers.

Power of Compound Interest

In a June 2012 white paper titled "Dividends Deliver," Eagle Asset Management noted: "From 1871 through 2003, 97% of the total after-inflation accumulation from stocks came from reinvesting dividends. Only 3% came from capital gains."

To put this into perspective, take a look at the example used by John Bogle, where he writes: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded)—an amazing gap of $32 million.” The reinvestment of dividends accounted for almost all of the stocks’ long-term total return.

Famed value investor and Wharton Business School professor, Jeremy Siegel, notes that reinvesting dividends allows investors to take advantage of down markets by buying more shares at cheap prices, which “accelerates” the upside once the market begins to recover. Value Line, in a 2010 article titled, “Yielding to the Allure of Dividends,” cites the famous example of the market crash of 1929: “Investors unlucky enough to get in at the peak (and hang on) would have had to wait about 25 years for prices to make up their losses. Following the strategy of reinvesting dividends would have shortened the wait by roughly 10 years.”

Recent performance trends show that investors need little, incentive to find high-yielding stocks, but these examples show that the important role of dividends is anything but a short-term phenomenon.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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