I often hear people say they have invested in bonds rather than stocks because, while the returns may be meager, “At least I get paid some interest”, as if stocks offered no immediate payout. True, some stocks don’t pay dividends, but a diversified portfolio of stocks will contain many stocks that do pay dividends, and do so quite generously! These dividends may be the most important and most overlooked part of investing.
Analyst Eddy Elfenbein, in a recent blog post 1 notes, “Dividends tend to grow, and reinvesting those dividends gets you more shares, which begets you still more dividends. The effect may be small each week, but it adds up. Consider that in the last 20 years, the S&P 500 price index is up 348%. But the Total Return Index, which includes dividends, is up 555%.”
Mr. Elfenbein includes the following graph, which shows the growth of the S & P 500 stock index over the past decade or so, and you can see that movements in the index, both up and down, are mirrored by similar changes in dividends. While the index grew from around 900 to over 2,000 during this period (about 220%), dividends per share on average grew from about $16 to almost $40 (about 240%).
Now that dividend yield is still only 2%, but the comparison to bonds today offers a striking contrast. Nick Murray, in his February newsletter 2 says it eloquently, “For much of January, 2015, the interest rate on the 10-year treasury broke down below 2%. Sure as you were born, a day is going to come when your grandchildren come and say, “Those days in 2015 … when stocks were actually yielding more than bonds …you had to know, right? When you could trade in a 10-year Treasury note for ownership in five hundred of the largest, best financed, most profitable companies in the world … and get ten years of dividend growth and price appreciation for free you did that with every dime you could get your hands on, right? … All that money’s got to be around here somewhere … doesn’t it?”
While no one knows when interest rates will begin to rise, all the experts agree that when (not if) that happens, bond prices will head south. So the “safe” investments you have in bonds or bond funds aren’t really all that safe after all. You need to look at Mr. Elfenbein’s chart closely … for a long time! It could mean a great deal to you and your heirs for a very long time to come.
1Blog post by Eddy Elfenbein, January 5th, 2015
2Nick Murray, Interactive, Volume 15, Issue 2, February2015