“If you don't know where you are going, you might wind up someplace else”
…as this bull market advances in age
Historically, dividends have been 40% to 50% of the total return for the stock market with price appreciation making up the remaining 50% to 60%. So a 7% return for the stock market in normal times can be derived from a dividend return of 2.8% (40% of the total return of 7%) and price appreciation of 4.2% (60% of the 7%).
In the early phases of a bull market recovery, price appreciation can make up 70% to 80% of the total return as stock prices/valuations are at very depressed levels. So a 20% total return during a bull market recovery can be made up of 16% (80% of the 20%) from price appreciation and only 4% (20% of the 20%) from dividends. As the bull market advances in age and valuations have risen from cheap to fair value, the price appreciation portion of total return will shrink back to its historic norms, with the dividend portion rising and becoming more prominent.
…as market volatility increases
Stock market corrections are normal and many corrections occur during every bull market. These corrections usually take many months to unfold can now occur within weeks/days as we have seen in December 2018 and May 2019. Stocks with dividends weather these quick down drafts much better than stocks without dividends because of the following reasons:
- The dividend component of total return is always positive and the largest portion of the total return. Investors will get paid quarterly even if the price component drops.
- The majority of the shareholder base of dividend stocks are investors (not traders) that buy and hold the stock for quarterly income. This stable shareholder base leads to lower volatility.
Investing into high quality dividend stocks is a core element of our investment process. We have always deployed this discipline in managing your investments, but now see dividend investing becoming more prominent under the current market environment.
We send these investment commentaries out as it is a quick way to get our thoughts to all our clients. As all our clients’ investments are customized, we would be glad to meet with you to discuss your investments in person.