All About Dividends

When it comes to stock investing, conventional thinking dictates that returns are all about capital appreciation.  However, for many investors, price appreciation may not be the main driver of total return at all.  In fact, dividends can constitute a larger portion of total returns than many people may realize.

Dividends Overlooked

According to Loomis Sayles, almost 50% of the S&P 500’s total return has come from dividends (when reinvested) since 1929. Blackrock estimates that up to 90% of the S&P 500’s total return over the past century can be attributed to the combination of dividends (reinvested) and dividend growth. Whether it’s 50% or 90%, the point is that stock returns may really be all about dividends.

Dividends are easy to overlook in the wake of a 150% stock market rally. However, market prices aren’t persistent, and during a correction, dividends may be the only positive return around. In addition, high-quality companies with stable, generous dividend yields tend to hold up better in difficult times.

A Good Example

Consider, for example, a company like Chevron.   It’s a $250 billion integrated oil and gas company based in the US.   The company’s engaged in everything from exploration and mining of oil to refining and marketing of petroleum products.  I’ve written about why I like this space in a previous post.

While big oil is often associated with companies that are old, mature, and boring, Chevron’s actually been quite an exciting story. For example, it’s delivered an average annual earnings growth rate of 38% over the past decade. Over the same period, it’s stock price is up over 250%. Meanwhile, the S&P 500 has only returned 22%.

Financially, Chevron looks strong as well. Based on it’s most recent balance sheet, the company has $5 billion in debt against $23 billion in current assets, $9 billion of which is cash. Earnings and cash flow have been positive for 10 years in a row and, the ROE has been double digits every year.

Meanwhile, Chevron also yields 3.10% per year in dividends.  In addition, that yield only constitutes 10% of earnings.  The average dividend payout ratio for the S&P 500 is about 30%.  Does that mean you should dump all your money into Chevron stock?  Of course not, I’m suggesting no such thing.  I’m just pointing out an example of what I think is a high-quality, dividend-paying stock.

The Bottom Line

Even if you think Chevron is the nuts, keep in mind that individual companies are bound to have surprises. It’s always good practice to hold multiple positions instead of concentrating on one or two.  Chevron or otherwise, just be sure to take positions in moderation and as part of a properly diversified portfolio appropriate for your circumstances.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves possible loss.  Victor Lai does not own any of the securities referenced in this posting.  Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting. 

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