In the Stock Markets, Dividends Still Matter (Commentary)

In periods of rapid growth in stock prices (for instance the late 1990s) and in periods of rapidly falling stock prices (as we witnessed in 2008), the concept of dividends seems to fall by the wayside.

After all, when you’re seeing dramatic percentage moves in stock prices, what difference does that 1 percent, 2 percent, 3 percent a year make, anyway? A quick look at market history shows that it makes a bigger difference than you might imagine.

Given the historic nature of what we’ve experienced in the stock market, I had to get some really good long-term data which meant pulling the 1999 edition of Ibbotson’s “Stocks, Bonds, Bills, and Inflation Yearbook” off the shelf.

The information may be a little dated, but the conclusion is clear. Looking at the chart below, note the staggering difference between the Capital Appreciation Index (price change only, excluding dividends) and the Total Return Index (includes price change and reinvested dividends).

From 1925 through 1998, the Capital Appreciation Index returned 6.5 percent annually, while the Total Return index returned 11.2 percent. That means that dividends contributed 4.7 percent annualized return, over 40 percent of the total return.

Of course, in the early days of the stock market dividend yields were considerably higher than they have been in recent decades, and therefore were likely to represent a higher portion of the total return. But as the market has sold off, we have seen an increase in dividend yields.

Given the recent downturn in the market, there has been some talk of the potential similarity to the ‘lost decade’ of 1965-1975, when the market was essentially unchanged after 10 years.

What’s misleading about that statement is that it ignores the impact of dividends on total returns. In fact, on a total return basis at the end of that decade the index was up 37 percent, or about 3.25 percent annualized.

In addition to the income they provide, we believe that dividends serve as a check on the quality of reported earnings, because it is difficult for management to cut a check out of earnings manufactured through an accounting gimmick.

We also understand that historically, and going forward, dividends have been an important component of total return.

The dividend yield on the S&P 500 is over 3 percent, higher than it has been for the last 15 years. This represents an opportunity to equity investors that should continue to accrue for years to come.

(James Bell, CFA is a portfolio manager at Garrison Asset Management. He may be reached at, 479-587-1045.)