I’m all in on dividends. I’m all in for good reasons. Dividends are income. Income is the bedrock of investing. Everything else is a speculation.
I’m also all in on one particular dividend investing strategy. This one dividend investing strategy beats the other dividend-investing strategies by a country mile.
The dividend-growth strategy is the one strategy to have if you can have only one.
Ned Davis Research analyzed S&P 500 stocks covering the years 1972 through 2016. Ned Davis Research divided the companies into two groups – dividend payers and dividend non-payers – based on the company’s dividend policy over the previous 12 months.
The “dividend payers” were then segregated into three sub-groups based on their previous 12 months of dividends. They were segregated into dividend growers (and initiators), no-change dividend payers, and dividend cutters and eliminators. The companies remained in their respective groups for the next 12 months or until a change in dividend policy took place.
Ned Davis Research then compared the wealth outcomes from the different groups. The outcomes are contrasting and stark.
Investing $100 in the dividend-growth members of the S&P 500 would have produced an ending value of $6,973. Dividend payers – a mixture of dividend growers and constant payers – would have produced the next-best ending wealth at $5,015.
The dividend non-payers and the dividend cutters and eliminators reside at the bottom of the totem.
Had you invested your $100 in companies that never paid a dividend, your $100 would have grown to only $289 over 44 years. Had you been so unfortunate to invest only in the dividend cutters and eliminators, you would have done better storing your $100 in a coffee can. The dividend cutters and eliminators turned $100 into $82 over 44 years.
The lack of price volatility among the best wealth creators is equally as impressive.
The dividend growers produced the highest returns while displaying the lowest price volatility. The dividend growers were less volatile than an equally weighted investment in the S&P 500. (Consistent dividend payers were also less volatile than the S&P 500.)
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The dividend cutters and eliminators not only produced a loss over the holding period, they displayed high price volatility. They were 25% more volatile than the S&P 500. This is no surprise. When a dividend is cut or eliminated, the share price frequently falls off a cliff.
When we delve deeper into the subject, we find that dividend policy is an effect, not a cause.
Consistent dividend growth is the result of coalescing fundamentals. Consistent dividend growth is underpinned by a strong balance sheet and exceptional entrepreneurial instincts. The former enables the latter to profitably grow the business. Profit growth, in turn, leads to dividend growth.
The good news is that we have entered a golden age of dividend growth.
U.S. corporations generate profits like never before. Corporate cash accounts have doubled over the past 15 years. Cash has never accounted for such a large percentage of assets as today. S&P 500 companies alone hold $1.8 trillion of cash.
The top corporate income tax rate was reduced 40% last year. The reduction ensures no let-up in corporate-cash growth. It ensures no let-up in dividend growth.
No velvet rope exists. Anyone can employ a dividend-growth strategy. The concept is simple. It requires no unique insight, exceptional skill, or superior prowess. All it requires is a solid dividend-growth stock and time.
If you’re in need of a solid dividend-growth recommendation, we have a supply of them at High Yield Wealth. As for time, that’s something you’ll have to supply.
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This One Dividend Investing Strategy Destroys the Rest
by Ian Wyatt