The Divine Power of Dividends
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When share prices seem to be doing nothing but going up, as they have lately with certain stocks like META (+43% YTD) and NVDA (+76% YTD), it's understandable if you’re starting to feel the fear of missing out. It’s hard not to, and I'd be lying if I said there were times I hadn't felt this myself.
However, during these times, it helps to bring your focus back to your long-term investment goals and listen to the advice of John Bogle, the founder of Vanguard, who said that “dividends are an investor’s best friend.” Bogle's extensive research, spanning over eight decades up to 2007, has shown the importance of reinvested dividend income over share price appreciation.
He wrote, “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded annually). If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded annually)—an amazing gap of $32 million.”
According to Bogle’s research, an astonishing 95% of the long-term returns generated by S&P 500 companies were attributed to dividends—a statistic that certainly shouldn’t be ignored. And while it might seem like dividends are taking a back seat in today's market frenzy, you’d be wise not to overlook their long-term impact, especially when things do eventually head south.
When it does, that's when dividend investing really shines, and the FOMO you may be feeling now will be long forgotten.
Dividend investing, by nature, is a more defensive strategy, and while the gains might not be as substantial when the market is booming, this approach can help shield against losses during market downturns. This is because consistent dividend paying companies are more likely to have stable cash flows, which adds resilience during turbulent times and helps support the prices of dividend-paying stocks even when the overall market sentiment is negative.
Take 2022 as an example. The S&P 500 dropped over 18%, and the NASDAQ was hit even harder. But many dividend investors, including myself, saw much better performance that year.
Source: Charles Schwab | My portfolio performance in 2022
While people love to share when their stocks are soaring (which is the spark that ignites the FOMO fire), minimizing your losses when stocks are in a slump is an underrated advantage that allows you to bounce back faster when the market improves, which can ultimately lead to better long-term performance.
In other words, it’s not always about making the most money during the good times, it’s about losing the least amount (if any) during the unpredictably bad times. And if you can manage to do both, that would be most ideal.
At the end of the day, risk can never be fully controlled or eliminated, but it can be managed wisely. I think a dividend investing approach helps you do that, and that’s one of the many things that makes me gravitate towards this style of investing.
With that said, I want to hear from you: What draws you to dividend investing, and what motivates you to embrace this strategy? Write to me here and let me know.
And a big thank you to all of the readers who responded to last week's newsletter! You can read some of the responses down below in the "Hot Takes" section. 👇
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IN MY PORTFOLIO 📈
Track your portfolio for free with getquin. You can also follow mine there (@ryne) to see all of my purchases, dividends, and other updates in real-time.
ICYMI 🎥
The PERFECT Dividend Portfolio (Only 10 Stocks)
In this video, we're building a dividend portfolio comprised of 10 rock-solid stocks, all of which will be familiar to brand new investors.
CAREFULLY CURATED 🔍
📺 The Pros and Cons of Dividend Investing - Russ Knopf and Kevin Burgess, two of my favorites fellas, recently teamed up for a very fun live stream where they talked objectively about the good, the bad, and the ugly of dividend investing. I think you'll really enjoy this one.
🎧 The Essays of Warren Buffett - This week, I've got another episode of the Founders podcast for you. In this one, you'll learn about some key takeaways from reading the Essays of Warren Buffett by the man himself with Lawrence Cunningham.
📚 Why Dividend Investors Should Be Smiling - Sure, some share prices have fallen (especially in the Real Estate sector), but if you're a dividend investor with a long-term outlook, then right now is a fantastic opportunity to swoop up some great businesses at wonderful prices.
SINCE YOU ASKED 💬
"I believe DGRW is a good ETF, but the dividends are all over the place. Using this as an example, can you tell me what I should have looked for?"
- Kevin | Email Submission
Overall, I look at a few different things when considering ETFs:
Fund Objective: Understanding the main objective of the fund is a great place to start when researching ETFs. This can typically be found on the fund's website (click here for DGRW's).
Expense Ratio: This is how much you pay in fees as a holder of the fund. DGRW's is 0.28%, which in my opinion, is high, especially when compared to something like SCHD or VYM.
Holdings: It's a good idea to take a look at the top holdings of the fund because, in essence, you want to know what you're buying.
Returns: While past performance doesn't tell you anything about how a fund will do in the future, looking at the long-term returns can help you get a sense for how it has historically performed in different market environments.
Have a question? Ask me here to see it featured in an upcoming newsletter.
HOT TAKES 🔥
Last week, I asked readers what their highest dividend payment has been so far. Here are some of the responses:
Bruce said: February was the biggest month I have ever had. I received $100.39 in dividend income from Plains All American (PAA)this month. Finally, its starting to get rolling and produce a nice quarterly amount from my 323 shares.
John said: COST special dividend $3.40
James said: My highest payment so far has been from MO. It paid me $117.60 from owning 120 shares back in January. So far, it's been my largest payment ever and I am still slowly growing it.
Dan said: To date, I believe my highest paying dividend has been from EPD at $30.90 but my next SCHD dividend DRIP tomorrow will be close to $62.
Brian said: My biggest payment so far was from SCHD @ $220 Dec '23, but SCHD is about 50% of my portfolio.
