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The Value of Dividends
November 12, 2015 | Russell Swansen, Chief Investment Officer; David Francis, Vice President of Investment Equities; and Mark Simenstad, Vice President of Fixed Income
Could a stock that never goes up in value be worth owning?
Perhaps, if it pays a dividend.
News accounts of stock market performance usually focus on price alone – how many points the Dow Jones Industrial Average has moved up or down, or how many dollars or cents a given stock has risen or fallen. But price only tells a small part of the story. Investors also need to consider dividends – the payments many companies make to their shareholders each year as a way of sharing corporate profits.
Dividends make it possible to earn money in the stock market even when stock prices aren’t going up
At first blush, the returns from dividends might seem modest. Recently, for example, the dividend yield for the Standard & Poor’s 500 Index – the annual value of all dividends paid out by the stocks in the index, divided by the market value of the stocks themselves – has been about 2%. In other words, $100 invested in the index would net you dividend income this year of about $2.
But what dividends lack in flash they make up for in consistency. Because while stock prices continually fluctuate, most companies pay their dividends without interruption for long periods of time, and often gradually raise them. Last year, 421 of the 500 companies in the S&P 500 paid dividends, including 375 that boosted their payout, according to S&P Dow Jones Indices. The York Water Company in York, Pennsylvania, has been paying dividends consecutively since 1816, and claims the record for the longest period of consecutive dividend payouts in U.S. history.
That sort of stability pays dividends – pun intended – for investors, who pocket those payouts regardless of how the stock market is performing. Data from S&P Dow Jones Indices show that reinvested dividend income constituted 40.7% of the monthly total return of the S&P 500 from January 1926 through September 2015.
Naturally, the contribution dividends make to a stock’s total return – its price change plus reinvested dividend income – can fluctuate based on how stocks themselves are faring. When the stock market is soaring, dividends account for proportionately less of total returns. When it is falling, dividends cushion the blow. From 2000 through 2009, the S&P 500 fell 24.1% on a price basis, but dividends allowed it to deliver a more palatable total return of -0.95%.
Mutual fund investors seeking dividend income can look for funds with the words “equity income” or just “income” in their name. The former typically invest in a mix of dividend-paying stocks, the latter in dividend stocks plus fixed-income securities. Funds automatically reinvest dividends paid by the stocks they hold.
To be sure, investing in dividend stocks is not a sure road to riches. When business gets tough, companies can and sometimes do reduce or even suspend their dividends. Changes in tax policy can impact the value of dividends, too. Right now, dividends are taxed favorably: at a 0% rate for taxpayers in the 10% and 15% tax brackets, at a 15% rate for those in the 25% through 35% tax brackets, and a 20% rate for those in the 39.6% bracket.
Investors also should note that the stock, or mutual fund, with the highest dividend yield may not prove more profitable than one with a lower yield or no dividend at all. If the yield is high because the stock or fund price has been falling – because the company is in trouble in the former case, or because many of the companies in the fund are in trouble in the latter – future dividend income may not be very secure.
Still, over time, dividends have played an important role in the returns delivered by the stock market, and some dividend stocks probably belong in most investors’ portfolios. If you’re not sure whether they are appropriately represented in yours, please consult with your Thrivent Financial representative. As always, he or she can make sure your portfolio is structured appropriately for your investment goals and tolerance for risk.
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In their Market Commentary, Thrivent Asset Management leaders discuss the financial markets, the economy and their respective effects on investors. Writers’ opinions are their own and do not necessarily reflect that of Thrivent Financial. Forecasts, estimates and certain other information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. From time to time, to illustrate a point, they may make reference to asset classes or portfolios they oversee at a macroeconomic level. They are not recommending the purchase of any individual security.
Asset management services provided by Thrivent Asset Management, LLC, a wholly owned subsidiary of Thrivent Financial, the marketing name for Thrivent Financial for Lutherans. While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.
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