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DIVIDEND CHAMPIONS

Why are dividends important?

  • Dividends provide a significant contribution to total return

  • Dividends provide downside protection

  • Healthy companies pay dividends

  • Dividends provide increasing cash flow to investors over time

  • Numerous academic studies confirm the importance of dividends

The table below illustrates the dividend contribution to total return of the S&P 500 for various decades.

Decade   Total              Price Only    Dividend    Dividend Contribution

                Return              Return         Return        to Total Returns                  

1900s             11.5%                       6.90%                  4.60%                       40%

1910s               5.5%                      -0.40%                  5.90%                     108%

1920s             16.7%                     11.00%                  5.70%                       34%

1930s               4.8%                       -0.30%                  5.10%                     106%

1940s           10.25%                        4.40%                  5.80%                       57%

1950s           18.20%                      12.70%                  5.50%                      30%

1960s               8.3%                         4.90%                 3.30%                       40%

1970s               6.2%                         2.10%                 4.10%                       66%

1980s             16.4%                       11.70%                 4.60%                       28%

1990s             17.4%                       14.70%                 2.70%                       16%

2000s            -0.10%                        -1.80%                 1.60%                       95%

 

Dividend Contribution to Total Return 1900-2010  51%

Source:  Ned Davis Research

Total Return has Two Parts
Dividends & Capital Gains

20.00%

15.00%

10.00%

 5.00%

  0.00%

-5.00%

1900's 1910's 1920's 1930's 1940's 1950's 1960's 1970's 1980's 1990's   2000's
Price Return                           Dividend Return

Over the period 1900 – 2010, dividends have contributed 51% of the total return!

Healthy companies pay dividends

  • Dividends represent investors sharing in the cash profits of a company.

  • Dividends, unlike earnings, cannot be “fluffed.”  Many accounting tricks, such as revenue recognition, non-cash charges, etc., can be used to massage earnings.

  • Dividends are real simple – either a company has the cash on hand to pay a dividend or it doesn’t!

  • By increasing the company dividend, manager are signaling their confidence in the company’s ability to continue to increase profits.

 

Increasing Cash Flow to Investors

  • High quality dividend payers frequently increase dividend payment over time.  For example, Procter & Gamble has raised its dividend every year since 1957.

  • Increasing dividends reward investors in two ways-

    • Increasing cash flow and

    • Increasing stock price

 

Academic Studies provide Proof

Robert D. Arnott in an editorial in the “Financial Analysts Journal of 2003 examined the various components of equity returns for the 200 years ending in 2002.  He concluded that dividend were far and away the main source of the real return one would expect from stocks.

  • Total annualized return for the 200 year period was 7.9% which consisted of a

  • 5.0% return from dividends,

  • 1.4% return from inflation,

  • 0.6% return from rising valuation levels and

  • 0.8% return from real growth in dividends

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