Many academic studies confirm that reinvesting dividends has been a major source of stock market returns over the long term.
According to report by Eagle Asset Management, anywhere from 40 percent to 70 percent of returns can be traced to dividends.
According to Eagle Asset Management:
“For the decade ending December 31, 2010, the S&P 500 Index ended essentially flat, what started as a $10,000 investment would have ended as $9,983. That same amount invested in the Mergent US Broad Dividend Achievers Index, an index that includes only companies that have increased their dividend payout each year over the past 10, would have grown to $11,257.”
As a result, many academics have identified dividends as key creators of value. Stocks that have paid higher dividends in the past have also generated higher future earnings growth, Eagle Asset Management says.
Stocks that have paid higher dividends in the past have also generated higher future earnings growth.
Dividend-focused strategies can bolster a portfolio in several ways.
First, many investors view dividends as a way to manage risk because dividend-paying companies typically have shown financial discipline and demonstrate the willingness and ability to increase dividends over time.
Secondly, companies that pay dividends must have cash on hand to do so and, barring a corporate crisis, investors historically have been able to count on receiving the dividend distribution.
“Companies with consistent dividend records historically have been more cautious and have tended to be less volatile than non-dividend-paying stocks”, says Eagle Asset Management.
Finally, dividends can cushion market corrections by offsetting price depreciation or offer additional positive return when capital appreciation options are limited by a slow growth environment.