The Proof is In: Dividends Always Matter

Published Mon, Jun 18th, 2012   Justin Fritz

Here at D&I Daily, the main focus of our strategy is to pinpoint stellar companies that pay out attractive but safe dividends. They’re the key to long-term investing success. It’s that simple.

And now, a new report from Dylan Grice, a research analyst from Societe Generale’s Global Strategy Team, backs up our philosophy…

In short, Grice teamed up with market strategists Andrew Lapthorne and Georgios Oikonomou to develop what they’re calling the “Quality Income Index.”

In it, they highlight various insights that revolve around the inherent benefits of – you guessed it – income investing.

According to Grice, “We’ve combined our admittedly modest individual talents to reach an immodest conclusion: That we can create an investable index of equities that we think generates relatively safe income, protects capital and (even) grows over time.”

To put it another way, Grice and his colleagues have found that the key to a solid income investing strategy is to focus on quality companies with a history of paying a steady dividend.

What’s more, during his research, Grice discovered that dividends might play an even more important role in investment returns than you might think…

Four Decades of Evidence

As Grice’s report shows, for the past four decades, dividends didn’t just help investors build income. Dividend yield and dividend growth have actually been the biggest factors in calculating total equity returns.

Check out the chart below to see what I mean. It shows us the total annualized returns of several countries since 1970. And it breaks down each country’s total returns into three segments, including dividend yield, dividend growth and multiple expansion.

As Grice puts it, the “chart shows that since 1970, dividends and dividend growth have been pretty much the whole story.”

Indeed, since you can clearly see that dividend yield and growth were the largest contributors of total returns in each country shown.

Considering that dividends are the main driver of equity returns – both domestically and internationally – it’s easy to see why dividends always matter in income investing.

However, it’s worth mentioning that you can’t just focus on yield alone. Dividend growth is key when pinpointing worthy income-generating stocks.

That’s important to keep in mind at a time when low stock prices are pushing dividend yields higher, and investors often pile in, seeking a bit higher yield than bonds. (A practice that popular financial blogger, The Reformed Broker, likes to call “income worship.”)

The problem is, the higher the yield, the bigger the chance the company could lower – or actually eliminate – the dividend down the road.

That’s why we’re dead set on finding companies that not only dish out attractive dividend yields, but ones that have also increased their dividend payouts year after year. As this is a sure sign that the company isn’t at risk of cutting its dividend in the near future.

And Grice agrees. As the report says, “Dividends are only sustained by companies economically able to sustain them… That means both its balance sheet and its underlying business economics are robust. Note that both are necessary.”

Good investing,

Justin Fritz

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