Which sounds better to you?
- Strategy 1, which turned $100 into $370.
- Strategy 2, which turned $100 into over $1 million, “some 270 times greater,” according to the authors of a study on these two strategies.
The numbers are legit…
Spanning 111 years and 19 countries, this study might be the most comprehensive one done on the topic. Elroy Dimson, Paul Marsh, and Mike Staunton of the London Business School did the study, and it appeared in the 2011 Credit Suisse Global Investment Yearbook.
The topic, surprisingly, is dividend-paying stocks.[ad#Google Adsense]Most investors don’t pay much attention to dividends. Heck, you can’t blame them… What’s the point? Week-to-week stock market fluctuations can be greater than the entire year’s dividend yield.
But you can’t think that way…
The study’s authors say, “While year-to-year [stock market] performance is driven by capital gains, long-term returns are heavily influenced by reinvested dividends… The longer the investment horizon, the more important is dividend income.”
As the authors remind us, academic studies of dividend yields have already proven that “higher-yielding stocks have outperformed lower yielders.” So they wanted to test a different wrinkle: “Perhaps higher-yielding [country stock markets] have also outperformed lower-yielders.”
The authors performed a simple test across their 111-year database. The results were astonishing…
Countries where the dividend yields were tiny delivered tiny gains. And countries that paid high dividend yields delivered off-the-charts returns.
The test could hardly have been simpler. Here’s how it worked:
The study ranked 19 countries according to their dividend yields at the end of each year. Then it divided the list into five groups, from those with the highest yields on down. (Each group had four countries, except the middle group, which had three countries.)
If you had started with $100 in 1900, and invested in the highest-yielding countries each year, it would have turned into over $1 million at the end of 2010 – versus $370 from investing in the lowest-yielding countries.
The results were uniform across all time frames, as the chart here shows. The highest-yielding countries’ stock markets always beat the lowest-yielding countries over time…
The authors have two conclusions:
1) Investors should focus on the long term and not be too influenced, or daunted, by short-term price fluctuations.
2) Dividends are central to stock valuation.
So what are the top four dividend-yielding countries right now? Spain, Portugal, Australia, and New Zealand.
If you’re bold enough, you might consider stepping up and owning country funds in these places… You have 111 years of history on your side.
But whether you invest in these countries or not, keep in mind, over time, dividends end up making up a much larger portion of your total return than you probably ever thought.
— Steve Sjuggerud[ad#jack p.s.]
Source: Daily Wealth