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The Importance of Profit Distribution

Dividends are an important factor in the long-term total return on stocks. In the current environment, where yields are low in the safest areas of the bond market, investors have increasingly turned to dividend-paying stocks to generate income. Dividends provide more than just income; when reinvested, they represent a significant portion of the long-term total return on stocks. The numbers below give an idea of the importance of dividends in the long-term total return of the stock market. The first figure is the yield from dividends, and the second is the yield from price changes alone:

The Impact of Dividends on Long-Term Total Return

From 1930 to 1979 and again from 2000, dividends were an important element in performance, but they played a modest role in returns during the 1980s and 1990s. During this time, stocks were delivering high price returns such that the dividend yield seemed unimportant. A company’s decision to pay dividends was often viewed as a sign that it had run out of opportunities for future growth investment. This situation has begun to change in the past decade, as investors have again begun to pay more attention to the importance of dividends.

The Power of Compounding

In a research paper titled “Dividends Deliver” published by the Asset Management Division of Eagle in June 2012, it was noted that: “From 1871 to 2003, 97% of total accumulated returns adjusted for inflation from stocks came from reinvested dividends. Only 3% came from capital gains.” To put this into perspective, let’s look at the example used by John Bogle, where he writes: “An investment of $10,000 in the S&P 500 at the beginning of 1926 with all dividends reinvested would have grown to approximately $33,100,000 by the end of September 2007 (10.4% compounded). If dividends were not reinvested, the value of this investment would have just exceeded $1,200,000 (6.1% compounded) – a stunning gap of $32 million.” Reinvesting dividends represents nearly all of the long-term total return on stocks.

The Performance of Dividends in Bear Markets

Recent performance observations by investors indicate that they do not need a strong catalyst to find high-yield stocks, but these examples demonstrate that the significant role of dividends is not just a short-term phenomenon.

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

Sources:
– JP Morgan. “Concentrated Dividend Growth Strategy.”
– NY Times. “Dividends as a Buffer Against Global Economic Uncertainty.”
– John C. Bogle. “Remarks Before the Financial Industry Regulatory Authority’s First Joint Meeting, Washington, D.C., October 15, 2007,” page 5.
– Value Line. “Succumbing to the Allure of Dividends.”

Source: https://www.thebalancemoney.com/the-importance-of-dividends-416840


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