Retire 187% Wealthier with Dividend Stocks
August 14, 2017
Dividends: Yes, They Matter
I got hooked on dividend stocks after my first check arrived.
Sure, I loved watching the value of my shares grow. This felt different, though.
Here was cold, hard cash arriving in my bank account each month. It was like getting a summer job, minus the burger flipping. Who wouldn’t love that?
Today, however, I see dividends as far more than a second income. They have become a way of doing business. Short of a polygraph test, dividends represent the only way we can tell if management cares about our interests.
That integrity can make a big difference in your returns. From 1972 to 2015, a $100.00 investment in the S&P 500 would have grown to $2,133. A portfolio of firms that initiated or increased their dividends would have grown to $6,136 over the same period. (Source: “The Power of Dividends: Past, Present, and Future,” Hartford Funds, last accessed August 13, 2017.)
In other words, you could’ve retired 187% wealthier by owning dividend growth stocks. Distributions, it seems, don’t just make for a nice income stream. They make for better companies.
Here’s why:
1. Dividends Inspire Confidence: Accounting rules leave a lot of wiggle room. While you don’t often see outright fraud, firms can get “aggressive” in tracking their bottom line. Dividends, however, require real cash. You can play games with sales and profits, but it’s tough to fake money in the bank.
2. Dividends Beat Stock Buybacks: Buybacks usually get announced during a boom. But when the cycle turns and markets crash, these plans get shelved. Call me old-fashioned, but buying low and selling high sounds like a better approach, not the other way around. It makes far more sense, one would think, to pay out a steady dividend each quarter.
3. Dividends Encourage Honesty: Options have become a standard part of employee compensation, especially at hot tech firms. For shareholders, this means their stake in the business slowly gets diluted. To hide this expense, management will often buy back shares. You can’t do that with dividends.
4. Dividends Show Who’s Boss: CEOs represent just another employee. It’s us shareholders that own the place. When management raises the dividend, they let us know who’s boss.
5. Dividends Kill Egos: Managers want to expand their empires, regardless of whether this growth pays off for shareholders. You often see this happen through mergers, overpriced acquisitions, and wasteful side projects. But while guiding over a bigger firm might stoke egos, happy executives won’t fund your retirement. Dividends, in contrast, enforce discipline. If half of corporate profits get reserved for owners, management won’t pick new projects willy-nilly.
6. Dividends Help You Sleep at Night: V. . .vol. . .volatility has become a swear word among my readers. The second you mention the dreaded “V” word, bad memories spring up. Dividend stocks, though, tend to have fewer ups and downs than their non-dividend-paying peers. And when “Mr. Market’s” mood turns sour, dividend stocks also tend to drop less. For me, at least, that means fewer sleepless nights.
7. Dividends Deliver in Good Times and Bad: Analysts fear economic growth could fizzle out. Will they be right? Who knows. But even if business stalls, you could do worse than dividends. If the growth side of equities fail to deliver, dividends can crank out good returns.
Not every stock should pay a dividend. New firms need money for growth. If management can invest my wealth productively, I’m happy to forgo my payments.
Such plays don’t come up that often, though. And for each executive with a great project on their plate, 10 are full of crap. For that reason, I’ll stick to stocks paying out big, growing distributions.
