By Skyline On Friday, April 27 th, 2018 · In

FIELD NOTE: MAY 2018

UNDERSTANDING RETURNS: DIVIDEND REINVESTMENT

Between 1950 and 2003 IBM’s stock increased 300% while Standard Oil of New Jersey (now Exxon Mobile) grew 120%. It’s easy to assume from these brief statistics that IBM was the more profitable investment; however, that would be incorrect. Due to dividends, shareholders of Standard Oil would have accumulated a $1.26 million portfolio while IBM shareholders would have $961,000.  

During Base Camp, all of Skyline's clients are informed that value stocks beat growth stocks 95% of the time over any 15-year period. (From 1926 to 2016 value stocks averaged 17% annual returns, while growth stocks averaged 12.6%.) As a rule of thumb, value companies have undervalued stock, i.e. a low P/E ratio, and pay out more of their earnings in the form of dividends. Growth companies tend to reinvest retained earnings due to a need for rapid expansion. Although growth stocks experience faster price increases (therefore attracting much media attention), shareholders receive little, if any, dividends.

The power of dividends lies within the compounding effects of reinvestment; dividends that are reinvested to buy more shares will produce more dividends, and the cycle continues multiplying returns ad infinitum. Over a 20-year period reinvested dividends from the S&P 500 resulted in a 321% gain; without dividend reinvestment that gain was only 190%.

S&P 500 Total Retuns

image

And the benefits continue; dividends not only increase investor return, but also dampen losses in down markets. Between 2000 and 2009 the S&P 500 produced negative price returns, but positive dividend returns. In the 2008 financial crisis the S&P 500 lost 37%, but dividend re-investors lost only 23%. Reinvestment of dividends between 2000 and 2009 (encompassing two major bear markets) resulted in a total return of -0.9%, compared to -2.6% without dividend reinvestment.

S&P 500 Dividend and Price Returns

image

Above all else, Skyline values maximizing total returns with a singular caveat; an individual’s volatility tolerance necessitates diverse investments. At Skyline, portfolios are weighted toward value and small cap securities, but always curated specifically toward a client’s needs. Skyline’s chief intention is to illuminate how assets are valued, beyond basic price returns, so that you can make intelligent investment decisions.

Sources: Rational Advisors: “Dividends Matter” & Hartford Funds “The Power of Dividends: Past, Present, and Future.

Contact a Skyline advisor to learn how you can harness the power of compounding dividends.

More
The 4% Distribution Rule

The 4% Distribution Rule

When Self-Control Fails

When Self-Control Fails

Second Quarter Market Review 2018

Second Quarter Market Review 2018

Cognitive Biases (Part Two)

Cognitive Biases (Part Two)

Cognitive Biases (Part One)

Cognitive Biases (Part One)

Understanding Returns: Dividend Reinvestment

Understanding Returns: Dividend Reinvestment

First Quarter Market Review 2018

First Quarter Market Review 2018

Update: The Fiduciary Fight

Update: The Fiduciary Fight