Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not how much you have at the end; it’s how much you could have made.
In response to the last post or two, people wanted to see the math behind “The Magic of Dividend Investing”, so let me talk to you in two parts about that.
The first is the one we will focus on for today.
Dividend Aristocrat Investing (remember what they are?—companies who have increased their dividends for 25-49 consecutive years, but are only in the S&P 500 as opposed to Dividend Champions who have the same dividend history as Dividend Aristocrats, but are not necessarily in the S&P 500—so there are 50 Dividend Aristocrats and 115 DIvidend Champions for 2018) has two things of note from a total return standpoint.
The first is that the total return for Dividend Aristocrat investing is superior to the total returns for the S&P 500 (with all dividends reinvested into the companies that generated the dividends in the first place) in the past 5, 10, 15, and even 20 years.
Here are the average annual total returns as of September 2016:
| Index | Total return – 2016 through Sept. 2 | Average total return – 3 years | Average total return – 5 years | Average total return – 10 years | Average total return – 15 years | Average total return – 20 years |
| S&P Dividend Aristocrats | 14.1% | 14.7% | 17.9% | 10.7% | 10.1% | 11.2% |
| S&P 500 | 8.3% | 12.5% | 15.6% | 7.5% | 6.6% | 8.2% |
| Source: FactSet | ||||||
If you don’t believe three percent better returns average over two decades isn’t terribly impressive, consider this article (which is a great read from 2016 which is also where the above chart was “borrowed”—pay attention to the graphs showing you the difference in the returns over time for $10,000 investment and imagine that that’s only for a one time $10,000 investment and not for yearly investment as any of you would be doing—right? Right?!?) as well as the following thought experiment.
Imagine getting 3% higher salary every year for twenty years than you usually would for DOING THE EXACT SAME WORK! Tell me that isn’t a significant return then. If you’re thinking that 3% a year more in your investments is a pittance, then you should gladly turn down the 3% bump up in pay because it won’t amount to anything. You can’t say the former and then argue against the latter.
One problem however…this leaves you with investing up to 50 different companies however. Several approaches can tackle this problem.
- Invest in each company with two percent of your total investment in stocks (not how much your total overall investment in all equities is) each year CON: It’s complex and requires many transactions with each one creating a fee each time thus reducing your total returns over time. Also, you have to keep paying attention to when a company drops off the list (pretty big news in the investing world) and when a new one gets added on. PRO: You get all the companies’ dividends and stock price appreciation the whole time you’re investing in them without fail.
- Invest in your favorite companies within the 50 Dividend Aristocrats by feel, by analysis, by lowest PE ratio, by the advice of your financial advisor, etc. CON: You don’t get all the benefits of dividends and stock price appreciation of all the companies, just the ones you’re invested in. Your total returns may be worse than the overall Dividend Aristocrats as your selections may underperform the others. This may cause you to drop these and pick up others…which can then underperform the following year. And so on and so forth… PRO: Your selections could outperform the overall Dividend Aristocrats. Even underperforming the overall Dividend Aristocrats, these selections may have total returns that still are greater than the S&P 500 which is, after all, the whole goal here. A small basket of stocks (ten perhaps) rather than 50 of them will be a lot less to manage, follow, and cost less in transactions.
- There is an ETF that does all the work for you by investing in all of the Dividend Aristocrats (though it modifies the dividend aristocrat definition, reducing the minimum standard to 20 years), tracks them, pulls out of a company if it falls off the Dividend Aristocrat list, and invests in a new one if it joins the list. CON: There is an expense ratio connected to it and the returns are lower than doing all 50 stocks yourself though its total return may still exceed S&P 500. PRO: All the work is done for you for a small expense ratio (0.35%) with far less transaction costs than the DIY approach to Dividend Aristocrat investing. Since the ETF began in 2006, it has nearly tripled in value ( a return of over (5 a year if you remember the rule of 114—and if you don’t, you’re a jerk since I posted about this in the past) and then add in the dividends (2.48%) to really juice the returns.
- You could do a hybrid of the above. 50 stocks is a lot to own, but not necessarily over 30-50 years of investing. Buy one a week and set up a DRIP and then you have all of them in a year and then add to them as you see fit/as your budget allows. The same could be done monthly thus allowing you to get all fifty within just over four years. Again, the beauty here is that once you’re in, the dividends start rolling in and increase your your stake in said companies increasing your next set of dividends in a glorious upward spiral of wealth.
- If you want no fuss no muss, then the ETF is the way to go. If you enjoy the challenge of owning a large panel of stocks for even a smaller basket, then go for it.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.
Until next time…