Core Strategy: Dividend Investing

My primary investment strategy to generate income and grow my portfolio in retirement is dividend investing. In this post I’ll discuss why dividend investing makes up the fundamental leg of my strategy.

It basically boils down to history. Historically, dividends have generated upwards of 45% of the average annual total returns for the S&P500 stock index. And this is going back to the turn of the 20th century and earlier. A 45% difference in annual returns compounded for over 140 yrs can make a bit of a difference (note: massive understatement!). Lets see some hard numbers. Below is a table I generated from the historical stock market data (S&P 500 index) from Robert Shiller’s website. I used the yearly data series, not the monthly for this. (If anyone wants my excel source, send me a note).

The data in the column on the far right shows the often touted figures for the historical returns of the S&P 500, average nominal returns of approximately 10% per annum. Without dividends the average annual returns drop to 5.33% per annum and thus dividends make up 45% of the avg total returns. So, dividends matter a lot! The Shiller data goes back to 1871 so I included returns going back to then and also showed the returns including the last decade. As you can see the much touted 10% a year for stocks drops considerably when one includes the last decade of returns. Also, the last 29 years before the onset of the 20th century weren’t so kind either. Including both these periods only increases the contribution of dividends to the total return figures. Up to 60%+ of the total returns.

Now, what impact does this have on wealth? Compounding these returns over these long periods of time produces tremendous differences in wealth. The chart below shows this difference in wealth of a $1 invested in the S&P500 from 1871-2009.

This is a log chart which makes the difference even more dramatic. A $1 invested in 1871 would have been worth $181 in 2009 without dividends. That same $1 with dividends re-invested would have been worth $70,000 at the end of 2009!

Need I really say more? Better long term compounded returns, period! These are the kind of results I’m looking for – at 42 I still have a 40+ year investment horizon.

Now, there are many more details to be explored in this data but for now my main point is to show why dividend investing makes up the core of my income investing strategy in retirement