Dividends as Key Indicators of Stock Performance Over 40 Years
As we reflect on nearly four decades of stock performance data, a significant trend emerges: companies with sustainable competitive advantages often reward investors with steady and increasing dividends.
Dividends are cash payments made to shareholders, typically expressed as dollars per share. For example, Coca-Cola (NYSE:Stock-ticker”>KO) provides a dividend of $1 per share.
Additionally, dividends can be analyzed as a percentage of the stock’s current price, referred to as the “yield.” You might hear, “Coca-Cola pays a dividend yield of 3%.”
A recent study by the reputable investment firm Ned Davis Research highlights the importance of dividends for investors.
This analysis presents some of the most valuable data available, suggesting that understanding this information could significantly enhance your financial success. Conversely, a lack of knowledge on this subject can lead to lost time and money. The critical data is summarized in the table below.
Investors should not allocate funds to the stock market without comprehending these insights.
The Ned Davis Research study examined stock returns from various categories within the S&P 500 index over a 44-year period, from 1972 to 2016.
Stocks were grouped into four categories based on their dividend policies:
- Companies reducing or eliminating their dividends.
- Companies that do not pay dividends.
- Companies paying dividends but not increasing them.
- Companies that are both paying and increasing dividends.
This classification reveals that two groups—those reducing or not paying dividends—generally struggled to send cash back to shareholders. One intermediate group managed to pay dividends but chose not to increase them. Meanwhile, the final category defined companies excelling in returning cash to shareholders by paying and raising dividends.
The findings are notable: companies that paid growing dividends yielded an average return of 9.86% per year. Those with stable dividends provided a 7.33% average return, while companies that did not pay dividends returned an average of only 2.46%. Stocks that cut or eliminated dividends faced average returns of -0.47% per year.
Here is that data in a visual format:
Source: Ned Davis Research
The results from this extensive study are unmistakable: companies proficient in paying dividends consistently outperform those that do not. As the ability to issue dividends improves, stock returns also tend to rise. Conversely, declining dividend capabilities lead to diminished returns.
Consistent dividend growth is a hallmark of a successful business, which translates into substantial shareholder returns.
You might wonder, “If I only focus on stocks that pay dividends, will I miss out on high-growth companies that prefer reinvesting earnings rather than paying dividends?”
To this, the answer is “Yes.”
By concentrating on dividend-paying stocks, you might overlook potential winners like Starbucks (NASDAQ:Stock-ticker”>SBUX) or Facebook (NASDAQ:Stock-ticker”>FB).
However, keep in mind that for every successful business like Starbucks, there are many failed ventures in its sector.
Similarly, for every thriving website akin to Facebook, countless others have faltered.
It is exceedingly rare for average investors to pinpoint these high-potential stocks early and maintain their investments long-term. Even seasoned professionals often struggle to identify these successful companies.
On the other hand, average investors typically find it easier to recognize companies that produce essential goods—like soap, burgers, and beer—that consistently raise their dividends.
These businesses are often located in your kitchen or bathroom.
If you’re focused on building sustainable wealth in the stock market, consider reevaluating your approach to stock selection.
Try categorizing each company you research into one of four straightforward classifications:
Does the business have rising, stagnant, or no dividends, or is it cutting dividends?
If a company does not provide consistently increasing dividends, then it’s best to forgo investing. Here’s a simple rule of thumb: Purchase the best and disregard the rest!
Best regards,
Brian
P.S. My colleague Louis Navellier specializes in Elite Dividend Payers but would ensure you’re aware of additional criteria…
He has specific requirements for stocks to earn a coveted A rating from him. Recognized as the “King of the Quants,” Louis is noted in the New York Times as an authority among growth investors.
He refers to these stocks as “Money Magnets.” Explore Louis’s latest insights at this link.
