“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
John D. Rockefeller – the famous (or infamous) oilman whose wealth was once equivalent to 2% of U.S. GDP – said that.
It’s a bit morose. And it’s supposed to be.
It originates from the November 1908 edition of Cosmopolitan Magazine in an article written about Rockefeller by muckraking journalist, Alfred Henry Lewis. Lewis was happy to criticize Rockefeller (and the rest of the robber baron class of the Gilded Age).
Lewis described Rockefeller as a lonesome man with beady, rat-like eyes.
His writing wasn’t exactly unbiased…
But, even today, Rockefeller is far from alone when it comes to his love of dividends.
We’ve come a long way since the early 20th century. Millions of Americans have been pulled out of poverty, largely due to the strength of the U.S. stock market. Dividends, in particular, have played a key role in the average investor’s ascension.
In its annual The Power of Dividends study, The Hartford Funds states:
Dividends have played a significant role in the returns investors have received during the last several decades. Going back to 1960, 85% of the cumulative total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.
If you’re a longtime reader, all of this should sound familiar. We’ve waved this flag more times than I can recall. And I’m happy to do it once more by sharing my favorite chart.
It’s this one:
Source: The Hartford Funds
This graphic speaks volumes about the importance of an income-oriented focus in the market.
But not everybody sees it that way…
There are plenty of dividend haters out there. Many people believe that they’re an inefficient (from a tax standpoint) way to return capital to shareholders. Some people even believe that dividends destroy shareholder value and should be avoided at all costs.
Those people are wrong. Full stop.
The chart above shows that. And, interestingly, a new study profiled by The Wall Street Journal this week does as well.
Consistent Dividends Means Quality and Value
From WSJ:
It turns out that caring about dividends can really pay dividends.
Finance professors have long tsk-tsked about investors’ love for cash payouts. But a recent report shows what people actually do with them and why they prefer receiving cash: because it works.
One of the original studies on dividends in the early 1960s said people shouldn’t care about the payouts. Maximizing wealth is the point, and dividends are just part of investors’ total return. Any cash a company pays out reduces its value by an equal amount, after all.
Those are the dividend haters I mentioned above, and there are still plenty of them.
But, as the article points out, human beings are not robots. There’s something emotionally satisfying about those regular payments. And, especially with rising dividend payments, reinvesting those dividends does wonders for compounded returns, as the chart above shows.
But the article goes on to cite a recent study which finds that – while those payments are nice – they also tend to be a signal for quality and value in the company issuing them.
WSJ again:
The secret seems to be that companies paying chunky dividends also tend to have value and quality characteristics.
[…]
“Value” is present because dividend payers have profits from which to pay them. And those payouts are meaningful enough as a percentage of their price to land them in an income fund.
And “quality” is often there because dividend payers are forced to be more judicious about any cash they don’t share.
When you think about it, this makes perfect sense.
Paying out consistent dividends – and, more importantly, consistently rising dividends – in a sustainable fashion requires a company to generate reliably increasing profits/cash flows.
And companies with reliably rising profits/cashflows tend to be the type of stocks you want to own for the long haul.
Put another way, your quarterly dividend is more than income. It’s a signal that the company issuing them on a regular basis is the type of business worth owning.
Investing in dividend stocks ensures that investors are owning the very highest quality companies in the world. And that’s why it’s our core focus at The Wide Moat Letter.
Dividend investing inspires investors to adhere to investment tenets that have resulted in success for hundreds of years.
John D. Rockefeller loved seeing his dividends come rolling in. I hope our subscribers can say the same.
Regards,
Nick Ward
Analyst, Wide Moat Research
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