Dividends are Only One Component of a Stocks Total Return | Stock Talk Podcast
Clients and long-time followers of Oak Harvest audio and video investment content will know that in addition to more standard blue-chip growth stocks, our investment team likes to invest in a diversified group of dividend growth stocks. In doing so, many of the portfolios our team manages take on the characteristic of what many in the industry call a “barbell” approach. A group of growth stocks paying little to no dividends with certain characteristics on one side of the barbell or scale and a second group of more economically “stable,” slower-growing companies paying out some of their excess cash flow back to shareholders in the form of dividends.
Clients and long time followers of Oak Harvest audio and video investment content will know that in addition to more standard blue chip growth stocks, our investment team likes to invest in a diversified group of dividend growth stocks. In doing so, many of the portfolios our team manages take on the characteristic of what many in the industry call a “barbell” approach. A group of growth stocks paying little to no dividends with certain characteristics on one side of the barbell or scale and a second group of more economically “stable”, slower growing companies paying out some of their excess cash flow back to shareholders in the form of dividends.
For this video I am going to break this barbell investing approach into 2 separate dumbbells and focus this video solely on the dividend paying investment component, and more specifically dividend growth compounding companies. I am Chris Perras with Oak Harvest Financial Group in Houston, Texas and welcome to our weekly stock talk podcast, keeping you connected to your money.
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As Troy, Charles, and myself discussed on our February 22nd YouTube livestream, our financial team at OHFG love stocks that pay our clients cash dividends over time. We specifically like to invest in companies that can be dividend growth compounders, not only paying dividends but raising that cash distribution over time. We aren’t focused on investing in high absolute yielding stocks, but would rather find companies whose business is growing organically, who can still distribute an ever increasing cash payout, by way of excessive free cash flow before borrowing, to its shareholders over future years.
As we’ve discussed in prior videos, dividends are just one of the two components of a stocks total return, the other being a stock’s price appreciation or depreciation. Even at the broad stock market level such as the S&P500, the multiplier effect and compounding of dividends is important. According to data from a calculator from DQY, dividends and their reinvestment have contributed to almost 40% of the S&P500’s total return since 1930, 30% since 1960, 25% since 1980, and even 30% since the top of the dot.com bubble which included the roaring 2010-2020 period for FANG growth stocks paying little to no dividends. Here’s the link to this fabulous calculator. https://dqydj.com/sp-500-return-calculator/
And here’s the summary data from the post WW2 era, Sept 1945 through 2022, which also shows dividends accounting for about 33.5% of the markets total compounded
return. It’s quite the powerful calculator showing dividends and their reinvestment make sense even at the passive index investing level.
Here’s a visual of the DRIP returns, dividend reinvestment affects, of compounding in a “boring” S&P500 index fund the last 40 years, since 1982. Reinvesting dividends back into the index, would have enhanced your total return by about 25%, or almost 2.5% annually for 40 years. Over 4 decades? That is a massive compounding affect for savers and retirees.
Taking it down a level to a single stock level, investing in longer term dividend compounders is particularly welcome to retirees and near retirees looking for additional sources of cash income. Investors always have the ability to turn off an automatic dividend reinvestment plan, and revert to letting these cash dividends build up in their investment accounts for current or future spending needs.
In addition to dividend income, these types of companies have historically offered investors a higher quality earnings yield as well as a less volatile total return profile by way of lower volatility in stock price movement. Here’s a great chart from Vanguard showing the higher quality aspects of an equity dividend growth strategy compared to the overall markets.
As one can see from the table on the left, these companies have exhibited higher returns on both equity and return on assets while at the same time showing lower return volatility over time. I also have to note, looking at the table on the right, that these characteristics also hold for the universe of foreign equities with established and growing dividend profiles. In other words, investing in dividend compounders have has also been a profitable risk return strategy in overseas markets over time.
However, as we have discussed in prior videos, all dividend yields are not the same. Just because a company pays a 5,7, or 9% dividend doesn’t make it better than one paying a 2,3,or 4%, hence our focus on sustainable dividend growth, not absolute yield levels. In fact, our research as well as the likes of Vanguards and others, shows that on average, the group of stocks yielding the highest level of dividends are most often value traps, not value stocks. Here are Vanguards stats on value and yield traps.
Remember viewers, when one invests in equities, we should be looking at total return. The combination of dividends and price appreciation. A stock that declines year after year, but pays you a high dividend, is not adding value to your portfolio or your financial plan, unless you are in need of a capital loss carryforward.
Take the example of two semiconductor companies the last twenty years. Remember viewers we are talking about the stocks as investments. We are not talking about whether we like the company as an employer or customer. This analysis is about investment returns on your capital.
We are going to compare Intel versus Texas Instruments once again from a total stock return perspective. I’ve referenced this example a few times over the last year. Here’s a side by side picture of the total return of Texas instruments vs. Intel since the Dotcom bubble peak over 20 years ago.
Since the dotcom peak, the total return of TXN has been near 375%, with over 215% of that being price and the remainder being the reinvestment of their dividend. During that same time, Intel’s stock has a negative total return. The stock has declined over -45% and the dividends they paid shareholders didn’t get one back to breakeven on a total return basis. This is at the same time that had you just indeed your money in the passive SP500, you would have returned about 190% in the index and another 150% on its compounding dividends had you been a DRIP investor.
In addition, Intel just a few weeks ago, cut their dividend by 75% back to levels it was decades ago. Intel’s lagging price returns for the last 2 decades were because of their declining business position in the semiconductor industry relative to other industry players Taiwan Semiconductor, AMD, Nvidia and others. The lagging performance of Intel’s stock could not be offset by its high dividend payout to shareholders. Not surprisingly, the stock’s relative performance to both its industry and the overall SP500 was sniffed out years before they cut their dividend.
Viewers, there is no perfect investment philosophy, that is all-weather, outperforming every stock cycle or in every economic environment. However, long-term research finds investing in consistent dividend growers and compounders and then reinvesting those dividends back into those companies has proven one of the better and more consistent ways to compound your money over time with lower equity volatility.
At Oak Harvest, dividend growth investing is just one of the many tools our advisors have to help our clients meet their retirement goals and objectives. In future videos we will be discussing other tools such as a “blue chip growth” portfolio of stocks that places less emphasis on dividend growers and more emphasis on stock price capital appreciation and compounding which is tax free in taxable accounts until realized.
Our team has multiple tools, both market-based and insurance-based, that we can use to meet your retirement goals. The OHFG team serves our clients by helping them plan for their future needs, instead of focusing on the past. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at +1877-896-0040 and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.