Investing in dividend stocks isn't just for retirees. If you're serious about generating strong long-term returns, then dividend stocks need to be a big part of your portfolio.
Not only do dividend stocks have less volatility year-to-year, they outperform non-dividend paying stocks over time too. That's right - those "boring" dividend stocks offer lower risk and higher total returns over the long run than those glamorous non-payers.
After last year's nearly +30% run up in the market, you might have forgotten that total return comes from two sources: price appreciation and dividends.
And believe it or not, over the last 80+ years, dividends have accounted for more than 40% of the total return equation.
A recent study by Ned Davis Research shows that dividend-paying stocks outperform their non-paying counterparts by a dramatic amount. From 1972 through 2013, non-dividend paying stocks earned a measly +2.3% return per year. But dividend-paying stocks crushed it with a +9.3% average annual return. And those that paid a dividend and raised it year after year did even better - generating a compound annual return of +10.1%!
Historically, companies have paid out a little over half of their earnings in the form of dividends, while the stock market has averaged a dividend yield of 4.4%. But the roaring bull market of the 1980s and 90s shifted focus away from dividends. By the year 2000, the payout ratio was hovering around 30%, while the market was yielding just 1.2%.
But after a decade of negative price returns, dividends appear to be making a bit of a comeback. The number of companies in the S&P 500 paying dividends (418) is at a 16-year high. And the current payout ratio of 32% is near a 10-year non-recessionary high as the dollar amount of dividends paid has more than doubled since 2004. Despite record high prices, the S&P currently yields 2.0%.
-- Todd Bunton, Zacks Weekend Wisdom