I’ve been saying it for years: growing dividends are the key to a rich retirement.
It could mean the difference between pinching pennies to scrape by or enjoying a nest egg that’s more than 18X larger.
And Wall Street is finally catching on. New research from Hartford Funds shows just how big of a difference dividends make.
Over the past 50 years, $100 invested into dividend growers and initiators turned into over $13,000 today.
That same $100 invested into companies that didn’t pay a dividend turned into just $694.
In an increasingly uncertain economy, it’s more important than ever to have reliable sources of income. Even better would be to have reliable sources of income that regularly grow to offset the effects of inflation.
The cherry on top is that these are the same companies you want to own to compound your wealth over the long haul.
Here at the Intelligent Income Daily, we’re focused on finding the safest income investments on the market. Some of our favorite companies have steadily grown and rewarded shareholders for decades. They’ve been through it all – from stagflation and double-digit interest rates to financial crises and recessions.
Today I want to show you why you should keep companies that grow their dividends in your portfolio. I’ll also show you an example of the power of dividend growth in action.
The Money You’re Leaving on the Table
Would you be willing to give up 40% of your investment returns?
According to an analysis from Fidelity Investments, since 1930 that’s the percentage of stock market returns that are due to dividends.
If you consider only decades when inflation was high, that percentage jumps up to 54% of stock market returns.
During the 2010s, dividends accounted for just 17% of the S&P 500’s total returns. That was an era of easy money and rapidly climbing stock prices.
But now inflation is back with a vengeance. And dividends are likely to play a more important role in keeping your retirement on track.
You might think the best dividend companies are the ones with the highest yields. But often those yields are higher for a good reason: the market thinks those companies won’t grow much or are paying a dividend that’s unsustainable.
Instead, it’s the dividend growers that give the best total returns, beating the market by an average of 2.5% each year. And they do it with 12% lower volatility, meaning their stock prices don’t bounce around as much.
Our own research shows that companies with longer streaks of dividend increases year after year are more likely to keep rewarding shareholders with raises.
In fact, a company that has reached more than 25 years of dividend growth is 5 times less likely to cut its payout in a recession compared to one that has less than 10 years of dividend growth.
The difference is that older companies have been through multiple business cycles and recessions – which happen about once a decade – and have learned how to survive.
These are the companies that have businesses with wide moats and seasoned management that have been through all kinds of economic environments. That’s especially important during recessions when the last thing you want is for your income stream to be reduced. With reliable dividend growers in your portfolio, you could be getting a raise right when you need it most.
Here’s an example of the power of dividend growth in action:
Southern Company (SO) is a utility company that provides gas and electricity to Georgia, Alabama and Mississippi. It has a 23-year dividend growth streak and just gave investors a 3% raise, bringing the yield to 3.9%.
Over the past 15 years, Southern Company has provided investors with a total return of nearly 280%. Every year it increases its dividend by 3-4%. However, its price per share has only gone up 90% during that time. That means that nearly 70% of its total return came from dividends.
Compare that to First Energy (FE), a utility company that serves parts of Pennsylvania, West Virginia and Ohio. The company kept running into trouble with regulators, racking up fines and penalties. More recently, it was caught in a bribery scandal. It stopped increasing its dividend in 2009, then cut the payout by a third in 2014. Its price is down 44%, and after adding back the dividends it paid, investors only managed to eke out a 12% total return over the past 15 years.
A steadily increasing dividend is a sign of a well-off company. If FirstEnergy investors had heeded the warning signs when their dividend stopped growing and was later cut, they may have gotten better returns elsewhere.
Now you know why growing dividends are so important.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
Source: Wide Moat Research