The Portfolio Managers at Campbell, Lee & Ross believe that dividends can be a powerhouse driving superior rates of return for your investment portfolio.
We know dividends are really important in driving the rates of return our clients get on their investment portfolios, but how and why do they help so much?
Two questions are important to answer in this regard. Why do dividends help portfolio returns so much? Also, are all dividends created equal when it comes to investment rate of returns?
The importance of dividends on portfolio rates of return cannot be denied. In fact, over longer term time horizons, dividends contribute so much to portfolio rates of return that, without them, returns would have almost been halved.
In the time period from 1939-2012, dividends contributed 42% of the total rate of return in a portfolio based on the S&P 500 index.
Dividends help accelerate gains and mitigate losses in investment portfolios.
Simple math tells us that a stock that has appreciated by 10% on a capital basis and has paid a 4% dividend has provided a 14% total return for your portfolio.
Conversely, a stock that has fallen by 10% and paid a 4% dividend has only suffered a 6% total return loss.
This mitigation of portfolio losses that dividends provide, ensures when markets do recover, your portfolio recovers more quickly than investment portfolios that do not benefit from dividend streams.
Are all dividends created equal?
When you look at dividends over a one year period, it is very easy to spot the better paying shares. A stock paying a 4% dividend would look much better than shares paying a 2.5% dividend. But what if the one paying 4% increased their dividend by 5% a year and the one paying 2.5% raised their dividend by 10% a year?
Over 30 years, as you prepare for your retirement or, during the 30 years of retirement when you are finished your working life, the company paying 2.5% and growing that dividend by 10% would be paying 25% more income to your investment portfolio.
On September 20, 2017, the Globe and Mail featured one of our senior portfolio managers, Darren Sissons speaking on dividends and your portfolio, including stock suggestions researched by Campbell, Lee & Ross.
(Note: The article is available only to Globe & Mail digital subscribers.)