Investors in the stock market want and expect the value of their investment to grow over time, but a company’s stock price is not the whole story. Investing in the stock market without considering dividends is an incomplete investment strategy with significant impacts on performance over time.
Dividends are regular payouts that some companies provide to shareholders in the form of cash or options to buy more shares at a discounted rate, known as a Discounted Reinvestment Plan (DRIP). The companies that offer dividends have stocks that fluctuate in value over time, but an investor’s return is not solely dependent on the stock price. While the return on non-dividend shares ebbs and flows with the market and the individual company’s decision-making, dividend shares act as a stable source of income despite those ebbs and flows.
To understand how dividends provide more stability, even in a downturn, it is important to understand their basic structure. Dividend payments are determined as a percentage of earnings. For example, a company might have a share price of $100 and a dividend payout of $3/share. The dividend price is constant regardless of the share price in the future. If the economy takes a hit, the company might see share prices decline, but the existing shareholder still receives $3/share. Shareholders can count on consistently receiving $3/share no matter what happens to the economy, making dividends a stable source of income for risk-averse investors.
Generally, the stability of dividend stocks compared to non-dividend stocks is a reflection of the types of companies that offer them. Companies that pay dividends tend to be well-managed because their responsibility to pay dividends to their shareholders four times per year limits the riskiness of their business decisions. Their stock prices might not provide steep gains year over year like younger firms and tech companies, but their business practices tend to provide a steady stream of reliable income through dividends.
With more stable returns over time, dividends also tend to contribute a greater portion of overall returns in a low return environment. Without dividends, equity returns would have been negative in the 2000s. Dividends are a win-win for companies and investors in an economic slowdown because they funnel money into the business and provide investors with stable income.
Not only are dividend payments stable, but they are also significant. Over the past century, dividends have accounted for roughly 40% of total return from the S&P 500 (1). That significant level of income has also historically outperformed non-dividend stocks. From 1991 to 2015, non-dividend stocks earned 4.18% return per year while dividend stocks earned 9.7% return per year, on average (1).
Because dividend stocks are becoming more popular and attractive options for investors, not all dividend-paying companies are doing so reliably. Some companies may borrow money in order to offer dividends while others might increase their dividends over time by more than their earnings are increasing. Therefore, active investing with fundamental analysis is key to dividend investment. TrueShares takes an active, fundamental investment approach. TrueShares Low Volatility Equity Income ETF (DIVZ) focuses on well-established, large-cap companies with market capitalization greater than $8 billion that can provide lower volatility than the overall market with above average yields.
Learn more about TrueShares Low Volatility Equity Income ETF (DIVZ) www.truesharesetfs.com/divz.
