The importance of dividends

You’ve probably heard lots about how important dividends are. That they make up something like 80% of the historical return of stocks. Here’s another interesting factoid.

When we look at historical data for backtesting it is almost always “total return”. That is, it includes dividends and price appreciation. However, this misses the reality that at the time we never talk about total returns. When you turn on the news they say “the market is flat” or “the market is down”. They aren’t adding in any dividends when they say that.

And all of that market commentary and noise is what adds to our stress.

There were actually thirteen years between 1871 and 1999 (in other words, ten percent of the time), where the price index registered a loss for the year but the inclusion of dividends was enough to turn the year into a net gain.

Ten percent of the time dividends will turn a losing year into a winning year.

For instance, in 1994 when you just looked at price, the market finished down -1.5%. But when you added in dividends, the total return was actually up 1.3%. The biggest discrepancy was in 1954 when the market finished down 4% but when you added in dividends you actually made 1.39%.

It is easy to look at a spreadsheet of historical returns and think, “Oh, well they made a bit of money in 1954.” But the reality is, if there had been CNBC back then, everyone would have been talking about how bad the year was because they market finished down nearly 5%.

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Learn how to enjoy early retirement in Vietnam. With charts and graphs.

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