Prior to the 1990s, dividends had provided investors with a significant portion of total return. In the five decades preceding the 1990s, for example, dividends yielded an average of nearly 50% of the S&P 500 total return1 annually. But then the internet happened.
In the latter half of the 1990s, speculative and hype-chasing venture capital inflated what is now known as the Dot Com Bubble2. Internet-based companies in the US saw a rapid rise in stock equity valuations during this period. The NASDAQ grew fivefold from 1995 to 2000. This growth was fueled by bullish market conditions in the 1990s as cheap capital allowed venture capitalists to invest heavily in new age internet startups, hoping for a quick and hefty payout while flouting caution in the process. By 19992, 39% of all venture capital investments went toward internet companies; most IPOs in 1999 were internet companies.
The focus on rapid growth and competition meant these internet companies were reinvesting all of their investment dollars back into the company, with some spending as much as 90% of their budgets2 on advertising. This wholesale takeover of the market by rapid-growth internet startups therefore significantly de-emphasized dividends. Dividends only contributed 16% of the total S&P 500 return1 in the 1990s.
When the Dot Com Bubble burst in the early 2000s, the impact was felt by startups and blue-chip companies alike. The NASDAQ plummeted 77%2 and didn’t rebound to its dot com era peak until 2015. The first decade of the 2000s is often referred to as the “lost decade”1 because the S&P 500 saw negative total returns for the decade as a whole. Economic growth was slow and stock market returns in the Dot Com Bubble aftermath were stagnant. The 9/11 terrorist attacks in 2001 also heightened economic uncertainty in the 2000s.
Because of this uncertainty and the backlash from such a growth-focused period, dividends made a comeback in the 2000s as investors sought stability and companies rewarded shareholders for staying invested. As a result, the market’s dismal performance in the 2000s was not an entirely lost decade, thanks to dividends. The dividend yield in the 2000s was actually positive at 1.81% annual return while the S&P 500 yielded -1.26% annually*. Dividends contributed 100% of the total return during the so-called “lost decade,” preventing the decade from being a total loss to those who invested in dividend-paying companies*.
The re-emphasis on dividends after the Dot Com Bubble burst was reinforced again after the 2008 housing market crash. Even though many companies were forced to reduce their dividends3 in the wake of the 2008 crash, dividends regained popularity as investors sought them out as more stable sources of income. The shift to dividends has proven fortuitous. Prior to and during the 2000s, companies that grew or initiated dividends historically provided greater return1 and less volatility than those who have maintained or cut dividends.
With two major economic crashes, the 2000s represent a worst case scenario decade for the stock market while at the same time highlighting the resiliency of dividends. This decade exhibited that dividends were less volatile and contribute significantly to total return, particularly during downturns. Investors interested in capital appreciation with below-average volatility during the current uncertain economic climate should consider adding dividends to their investment portfolio. The TrueShares Low Volatility Equity Income ETF (DIVZ) is concentrated in 25 to 35 well-managed companies across a range of sectors and seeks dividend growth over time, for whatever lies ahead.
* Source: Professor Robert J. Shiller Dataset, Yale University, Opal Capital. Data supplied by Robert Shiller, Opal Capital calculated price appreciation, dividend yield and dividend contribution. Rate expressed in percent and annualized.
Dividends are not guaranteed and can fluctuate. Past performance does not guarantee future results and there is no assurance that the Fund will achieve its investment objective.