We often read in the press about the importance of dividends. However, the significance can be easy to under-appreciate. Dividends can be a relatively modest amount of money being reinvested or showing up in our accounts on a monthly or quarterly basis. So, why are dividends important?

Dividends Can Make a Significant Difference in Returns Over Time

The reinvestment of dividends has historically made a significant difference to an investor’s ultimate wealth. As shown in Figure 1, an investor who invested $10,000 in the S&P/TSX Composite in 1977 had over $638,000 at the end of 2020. The same investor who did not reinvest the dividends had only about $172,000.

Figure 1: Dividends have consistently and Significantly Contributed to Total Returns, Year After Year

Source: RBC Global Asset Management

Dividend-Paying Stocks Have Historically Outperformed

Second, dividend-paying stocks have outperformed their non-dividend-paying counterparts. As shown in Figure 2, since 1990 dividend-paying stocks have comfortably outperformed the S&P/TSX Composite Index. Meanwhile non-dividend-paying equities barely managed to post a positive return. By investing in dividend-paying equities over their non-dividend-paying counterparts, investors are tilting the probabilities of outperforming in their favour.

Figure 2: Total return comparisons

Dividend-Paying Stocks Have Historically Displayed Lower Volatility

We all know that one of the hardest things to deal with as investors is volatility. When a stock declines in value it can be difficult to resist the temptation to make an emotional decision. While dividend-paying stocks are not immune from volatility, these stocks have historically displayed lower volatility than their non-dividend-paying or dividend cutting** peers.

**Dividend cutters are companies that have reduced their dividend payouts to shareholders

While there are many quality companies that don’t pay dividends, historically dividend-paying companies have exhibited better returns and lower volatility (as measured by standard deviation) than their non-dividend-paying peers. Furthermore, by reinvesting these dividends, investors can harness the power of compound interest. This can make a big difference over time.

Having a component of one’s portfolio invested in a dividend and/or dividend growth equity strategy remains a core strategic component of our team’s investment discipline. There are times in a market cycle where dividend-paying stocks come in and out of favour. However, the long-term evidence indicates that dividend-paying equities have historically produced higher returns and lower volatility. Consequently, holding high quality dividend-paying equities within our client portfolios is a key part of our equity strategies and asset allocation decisions.