The importance of dividends

27 October 2017 by National Bank
The importance of dividends

The vast majority of investors underestimate the importance of dividends, focusing almost entirely on capital gains from their shares when assessing their returns. However, according to a 2012 study by Guinness and Atkinson, dividends are responsible for more than 50% of total S&P 500 returns since 1940 when all 20-year periods are examined.

Moreover, prioritizing dividends when selecting investments appears to ensure better performance in the long term. As proof, here are the numbers from the same study on returns (as at December 31, 2011) for the various approaches from 1972 to 2012:

S&P 500: 7.3%

Non-dividend shares on the S&P 500: 1.7%

Shares that cut their dividends on the S&P 500:  -0.5%

Shares that maintained their dividends on the S&P 500: 7.4%

All dividend-paying shares on the S&P 500: 8.8%

Shares that increased their dividends on the S&P 500: 9.6%

This is an interesting phenomenon, particularly at a time when investors appear to be prioritizing quick profits by implementing short-term trading strategies, which as a general rule, increase risk instead of reducing it. In addition, in New York between 1950 and 1970, shares were held around six years on average. Today, it’s less than a year. It would appear that a simple “buy and hold” strategy, as favoured by Benjamin Graham and other investment experts, provides better performances and allows investors to take advantage of dividends and reinvested dividends.

Can investors be blamed?

It can be tempting to chase after the best performance and the constant stream of new investment products coming out can influence investors. Moreover, real-time access to information makes it extremely easy and inexpensive to buy or sell positions. Wanting to buy and hold shares may seem like a highly attractive strategy at first, but day-to-day market fluctuations that are reflected in your portfolio add a measure of emotion to the investment process. The first reflex can then be to want to take over control. That’s when mistakes begin to pile up and the expected returns quickly diminish.

Selecting solid dividend-paying shares can be tough, as you also need to ensure sound diversification across geographic areas and sectors. Index-linked products that focus on dividend strategies can be a highly attractive choice, as they combine diversification and low costs.

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Jean-Philippe Bernard is an advisor with National Bank Financial. National Bank Financial is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). The opinions expressed herein do not necessarily reflect those of National Bank Financial. The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The securities and sectors mentioned in this document are not suitable for all types of investors and should not be considered as recommendations. 

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