The Power of Dividends

Investors usually only pay attention to the current price of their stocks, mutual funds, or Exchange Traded Funds (ETFs). Sometimes they will compare current prices with where their investments were during a certain time period, for example how these have performed during the current year. Doing this type of analysis right now with most major stock market indices could lead to frustration amongst investors as most have now had long periods of time basically marching in place. However, doing this sort of snapshot analysis can miss the underlying power that dividends can have in a portfolio. Let’s take a real world example to illustrate my point.

Above I am showing a price chart of the S&P 500’s ETF {SPY}. I use charts of the ETF because it is something that most investors can own versus the actual S&P 500. The chart above is from Tradingview.com, a leading provider of investment and market data, though the annotations in it are mine. I like showing longer-term charts because it allows investors to focus on the big picture instead of day-to-day market fluctuations. While it may seem complex and messy at first glance, the chart is showing the performance of the S&P 500 from November 2014 through June 23, 2016. The yellow highlighted band shows the range where the market has traded for a majority of this timeframe. 

It also shows overall trends in the stock market over longer periods of time, which enables investors to prioritize the big picture. Here’s something interesting to note when looking at this chart: If you had bought the S&P 500 back in early November 2014, you would have earned slightly better than 3% in price appreciation through June 23, 2016. You also would have endured two downdrafts of roughly 10% during that period.  

However, you would have also collected $7.47 in dividends since your purchase of SPY. The dividends are indicated by the circled "D" on the chart. If you go to Tradingview.com and punch in SPY, you can hover over that "D" and see the date and the amount of each payment. Investors use the S&P 500 as an index representative of the US stock market and also as a proxy for the economy, so how the S&P 500 is trading gives us a rough idea on investors’ thoughts about both. As noted, the index has seen minimal appreciation in the past few years, likely reflecting investor uncertainty over the future. However, and perhaps reflecting that anxiety, the current annualized yield is slightly over 2%. If past history is indicative of the future, the dividend on the index will on average be increased between 2–7% per year. The current yield, as of this writing, on a one-year US Treasury is 58 basis points or 0.58%. The 10-year US bond yields a 1.73%.* Investors are locked into whatever yield bonds are trading on the day they make their purchases. 

Now, let’s be clear about something. We all know stocks go through corrections and sometimes worse. Owning stocks, ETFs, or mutual funds means you have to accept the inherent volatility in markets and understand that declines will occur at some point. Also, your exposure to equities as an asset class should depend on your unique risk/reward criteria. I also will point out that the actual dollar gains from that yield can be lowered or wiped out when stocks correct. In so saying, you can currently receive a better yield in the S&P 500 than you can from US government bonds. I stress yield here because I'm focusing solely on the yield, not price appreciation or total return.  

Owning a 10-year bond with a yield under 2% like now basically says investors feel negatively about  the future economy. They are willing to accept a yield where probability suggests that after inflation, and in many cases taxes, an investor will likely just break even during that 10-year period for the certainty of getting one’s principal back.  

Markets are volatile. They go both up and down and are therefore filled with uncertainty over the future, but growth investing along with dividends has been shown over time to generate positive total returns. In the case of this current market phase, where we've basically gone nowhere since November of 2014, you've literally been paid to wait by owning SPY.

*Long ETFs related to the S&P 500 in client and personal accounts. Please note that positions can change at any time without notice. Bond market returns were taken from sources deemed to be reliable at the time but cannot be guaranteed.

How We Can Help

Don’t let the complicated nature of the market turn you off of being in control of your finances. We are here to guide and educate you. If you have more questions about how we implement dividend investing in client portfolios, or would just like to better understand the details of your portfolio, we would love to talk to you! Please contact us at 708.488.0115 or by email at lumencapital@hotmail.com.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.

Christopher R. English is the President and founder of Lumen Capital Management, LLC.-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for private investors and also manage a private investment partnership currently closed to outside investors. The information derived in these reports is taken from sources deemed reliable but cannot be guaranteed. Mr. English may, from time to time, write about stocks or other assets in which he or other family members has an investment. In such cases appropriate disclosure is made. Lumen Capital Management, LLC provides investment advice or recommendations only for its clientele. As such the information contained herein is designed solely for the clients or contacts of Lumen Capital Management, LLC and is not meant to be considered general investment advice.