Why Dividends Matter
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.
*Cumberland and Cumberland Private Wealth refer to Cumberland Private Wealth Management Inc. (CPWM) and Cumberland Investment Counsel Inc. (CIC). NCM Asset Management Ltd. (NCM) is the Investment Fund Manager and CIC is the sub-advisor to the Kipling and NCM Funds. CIC is also the sub-advisor to certain CPWM investment mandates. This communication is for informational purposes only and is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. Reasonable efforts have been made to ensure that the information contained herein is accurate, complete and up to date, however, the information is subject to change without notice. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involved inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility. Past performance does not guarantee future results. CPWM and CIC may engage in trading strategies or hold long or short positions in any of the securities discussed in this communication and may alter such trading strategies or unwind such positions at any time without notice or liability. CPWM, CIC and NCM are under the common ownership of Cumberland Partners Ltd. Please contact your Portfolio Manager and refer to the offering documents for additional information.