Which strategy do you choose?
You’re likely an income investor. You shouldn’t have had to think too hard or too long for an answer.
Dividend-stock investing should be your choice.
I’m certainly a fan of the strategy. In fact, I won’t have it any other way. Every stock in my investment portfolio pays a dividend.
That said, I prefer one dividend-stock strategy. This one strategy beats all others by a country mile.
Dividend growth is the strategy. The data show it’s impossible to refute its success.
Ned Davis Research analyzed the S&P 500 stocks covering the years 1972 through 2018. Ned Davis divided the companies into two groups – dividend payers and dividend non-payers – based on the company’s dividend policy over the previous 12 months.
Ned Davis then segregated the dividend payers into three sub-groups – dividend growers (and initiators), no-change dividend payers, and dividend cutters and eliminators – based on their previous 12 months of dividends.
The companies remained in their respective group for the next 12 months or until a change in dividend policy. Ned Davis compared the wealth outcomes from the different groups covering the 46 years.
The winner really did outpace all others by a country mile.
Investing $100 in the dividend growth members of the S&P 500 would have produced an ending wealth value of $7,499.
Dividend payers – a mixture of dividend growers and constant payers – were next up. Your $100 would have grown to $5,015 by the end of 2018.
Had you used your $100 to buy the entire S&P 500, your ending wealth would have been $2,741.
What about the non-dividend payers? This group, after all, includes the fastest-growing companies in the S&P 500.
Forty-six years is a long time. Exceptional growth is impossible to maintain when running a marathon.
Your ending wealth value would have been only $305. That’s a paltry 2.5% average annual return.
And if you had the misfortune to invest in only the dividend-cutters and eliminators, go to the end of the line. You’d have turned your $100 into $69.
More return with less risk.
The lack of price volatility with dividend stocks is equally impressive as the returns.
When measured by standard deviation, the dividend growers produced the highest returns while displaying the least price volatility (15.6% standard deviation). The dividend payers were the second least volatile stocks (16.4% standard deviation).
As for the most volatile group, no surprise here. The dividend cutters and eliminators not only produced a loss over the holding period, they displayed the most price volatility. They were 25% more volatile than the S&P 500.
So, why is the dividend-growth strategy such a powerful wealth generator?
It’s all fundamental.
Persistent dividend growth is underpinned by a strong balance sheet and exceptional entrepreneurial instincts. The latter (management) is able to profitably employ the former (the company’s assets) to grow the business. Earnings growth leads to dividend growth.
The good news is that we have entered a golden age of dividend growth. You have never been presented with more opportunities to exploit the dividend-growth advantage.
U.S. corporations generate earnings like never before. Corporate cash accounts have doubled over the past 15 years. U.S. companies held a record $2.5 trillion in cash at the end of 2018.
All you need to do is get in the game. The dividend growth strategy is straightforward. It requires only a solid dividend growth stock and time. Put both to work and you will soon enough be accumulating market-crushing stock returns.