Dividends Pay Dividends

As this issue was being written, quality bonds were providing modest yields.¹ U.S. Treasury notes, for example, were yielding between 0.15% for the two-year maturity and 0.65% for the ten-year note.  These high-quality bonds, of course, provide other virtues: diversification, liquidity, and timely payments of interest and principal.

Meanwhile, many investors may be overlooking the importance of dividends over time.  In fact, according to Morningstar, reinvested dividends accounted for 42% of the stock market’s return from 1930–2019, as measured by the S&P 500 Index.² With growth stocks in particular, a rapidly growing dividend may be one of the most significant contributors to the success of an investment.

At Compass, we invest in high-quality stocks.  One measurement of our claim of high-quality purchases is how our core stock companies have increased their dividends over time.

As shown in the chart below, Compass’s dividend income increased 12.01% per annum compared to the S&P 500 Index with an increase of 7.09% per annum (2005–2019).

For example, in a sample portfolio composed solely of Compass “Core 25” stocks , cash dividends paid in 2005 were approximately $33,000.  By 2019, the dividend income had increased over five-fold to $161,000 (not including an additional $40,000 of special dividends paid).  Moreover, the value of this sample portfolio over this period has more than tripled to $10.1 million!

So, what can we conclude from this?  Using a rising dividend income stream, it appears our Compass core stock portfolio is quite healthy.  Of course, rising dividends cannot assure investment success, nor would a sensible investor buy or sell stocks simply because a company pays a dividend.  However, if growing income from growing dividends is a result of rising revenues, profits, and free cash-flow, it certainly improves the possibility of long-term success.

¹June 1, 2020

²S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Indices are unmanaged and not available for direct investment.

³Past performance does not guarantee future results. For illustrative purposes only. Dividend-paying stocks are not guaranteed to outperform non-dividend paying stocks in a declining, flat, or rising market.

⁴Compass dividends based on actual client investment into Compass Core 25; reinvesting dividends, plus money market interest. Compass totals do not include approximately $40,230 of special dividends paid, whereas special dividends are included in the S&P 500 Index returns. S&P 500 Index dividends from Bloomberg.