Boston - Dividends have long been a foundational element in many investor portfolios because of the tangible benefit they provide from monthly or quarterly income. Research has demonstrated that dividend-paying stocks have historically outperformed the broad equity market and have outpaced inflation with less volatility. This is largely due to dividend growth.
Companies with the ability to grow revenue, operating profit and free cash flow can, over time, deliver increasing payouts to investors, which can improve potential returns and help offset the impact of inflation. We believe the shifting market regime presents the perfect opportunity to dust off your dividend investing playbook.
Dividend paying stocks outperform non-dividend paying stocks
According to research from Ned Davis, dividend-paying stocks have outperformed the S&P 500 and non-dividend paying stocks with significantly lower volatility since 1973.
Dividend growth has historically outpaced inflation
With inflation running well above historical levels, it is important to realize that the S&P 500's dividends have historically outgrown inflation, making dividends a critical component of the real returns an investor receives.
This has been especially important during periods where inflation has been significantly elevated such as the 1970s, when 72% of the decade's total return came from dividends.
Market regime shifting from capital appreciation to capital return
Since 1930, about 40% of the average annualized return for the S&P 500 has been generated from dividends. However, in the most recent decade (2010s), the main driver of returns came from capital appreciation. With the backdrop of higher interest rates, we believe investors should focus more on companies capable of sustainable free cash flow growth, which underpins a company's ability to pay and help grow its dividend.
In this coming decade, we think dividends are likely to play a significant role in total shareholder returns as pure capital appreciation becomes more difficult in an environment characterized by rising interest rates, currency fluctuations and geopolitical instability.
Bottom Line: We believe dividends will be a much bigger driver of equity returns this coming decade than in the 2010s.
Standard deviation is a measure of how much an asset's return varies from its average return over a set period of time.
