Most value investors realize the power of long-term investing strategies in creating and sustaining wealth. This concept is often lost on the general investing community, which sacrifices long-term success for short-term gratification.
When it comes to effective portfolio-building, history is the best teacher. By looking back through time, we can clearly see that dividend-paying stocks are the bedrock of any well-diversified portfolio. What’s more, they’re proven to outperform during periods of increased volatility and uncertainty.
Dividend Stocks Play Key Role in Long-Term Success
Dividend stocks are beloved by value investors because they provide both reliability and growth over long periods of time. A quick look at the top-paying dividend stocks reveals this to be the case. Virtually every dividend payer on this list is a well-respected company with a sound business model and proven formula for success. This makes them well positioned to distribute earnings to shareholders on a regular basis.
A brief historical analysis also shows dividend growers lead market returns over the long term – and not by a small amount either. Research by RBC Global Asset Management found that dividend growers posted compound annual returns of 11.7% between 1986 and 2016. Dividend payers generally saw annual returns of 9.9% over the same period. By comparison, the Canadian S&P/TSX Composite Index returned just 6.6% annually over the same period.
A 2016 whitepaper from Hartford Funds also found that 81% of the total return of the S&P 500 going back to 1960 is attributed to reinvested dividends and the power of compounding. What’s more, dividend income constituted 33% of S&P 500 monthly total return between 1926 and 2015, with the remaining portion coming from capital appreciation.
According to Ned Davis Research, dividend growers posted an average annual return of 10.07% between 1972 and 2013, which is slightly higher than the 9.28% returned by the broader dividend-paying universe. Annualized returns for both categories exceeded 23% during bull markets. Meanwhile, the equal-weighted index saw gains of 7.64% during the 41-year stretch. Non-dividend paying stocks rose just 2.34%.
Although dividend contribution to the total return varied on a decade-by-decade basis, their returns have been strong during periods where total returns were less than 10%. This was evident during the 1940s, 1960s and 1970. These results are a clear indication that dividend-centric portfolios are a key to long-term success.
After being de-emphasized in the 1990s, dividend strategies made a roaring comeback following the dot-com bubble. In the 2010s, dividends contributed nearly one-fifth of the S&P 500’s total return. That was the highest since the 1980s, when the contribution was 28%.
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Dividend Stocks are a Hedge Against Volatility
Dividend-paying stocks have displayed lower volatility over time, providing long-term investors with a steady source of income. Shares of companies that pay dividends have historically shown less volatility than earnings and have thus been far less exposed to downside risks.
Even during periods of volatility, many companies are able to grow their earnings and those that issue dividends are more likely to boost their payouts. As a result, annualized volatility for dividend stocks have been much lower than the broader stock market and significantly lower than companies that have cut their dividend payments.
What’s more, companies that cut their dividends often face negative consequences. On the other hand, companies that initiate or grow their dividend have experienced the highest returns relative to other stocks since 1972 – all while exhibiting significantly less volatility. This is why so many market participants are incorporating dividend plays into their portfolio.
Although market volatility is currently very low, the CBOE VIX tells us that volatility is mean reverting, which means it tends to return to its historic average. Weak economic growth, geopolitical risks and uncertainty on the domestic policy front suggest volatility could creep back into the picture in the future.
Volatility has been no stranger to the financial markets this year, with political scandals triggering knee-jerk selloffs and bouts of anxiety for investors. This is expected to continue as market participants seek new justifications for Wall Street’s record-setting run amid a broad slowdown in the economy.
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Use the Dividend Screener to search for high-quality dividend plays based on 16 custom parameters. You can even sort stocks with a DARS rating above a specific threshold.
Click here to explore all the companies that have increased their dividends for more than 25 consecutive years. The following link also reveals a list of companies that have increased their yields for ten consecutive years.
The Bottom Line
Although past performance is no guarantee of future performance, history has a way of separating winners and losers. In this case, history is clearly on the side of dividend stocks, which have far outpaced the broader market over the past 50 years. Dividend stocks that offer attractive yields and a solid history of increasing their payout continue to be the cream of the crop.