Dividends are a recurring, stable income flow of real money into your account. Over long horizons they have contributed roughly a third of S&P-500 total return. The annual dividend payout is mort often than not quite stable and will only be cut during times of severe hardship for the company. This leads to very long periods of either stable or increasing annual DPS (Dividend Per Share) payouts.
In addtion, reinvesting dividends stabilizes long-term returns, even during times of negative price returns, if they are not used to simply pay your bills and living expenses.
Some of the characteristics of dividend payments, especially from Dividend Aristocrats / Kings, support the stability, downside protection. and lower volatility across the portfolio:
- Dividend payouts are less volatile than share price
- Across all companies the dividend amount is much more stable that the share price. This is natural enough, since the share price is changed every trading session, minute-by-minute, whereas the dividend amount is decided typically once a year by the General Assembly of the company
- Dividend payers / growers show lower overall stock price volatility
- It has been shown through a number of studies (a.o. Kiplinger / March 2022) that the business models and the management discipline across the years will produce a company with lower beta, less drawdowns). This can be measured by a beta of 0,8 of the Dividend Aristocrats vs the SP500 of 1.0 beta
- Dividend growth is much smoother than the stock price across the years
- The companies with a dividend as part of their capital return policy, are naturally inclined to grow the dividend at a reasonable and sustainable pace, so as not to jeopardize the streak of increasing dividends
- Dividend payers / growers have fallen less in downturns / recessions than non-payers
- The difference according to a Barron´s study is as much as 25% vs 37% (SP500)
All of the above leads to reliable and stable returns from the dividend companies – and remember during thick and thin, across business cycles and regardless of any geopolitical tension, the dividends keep coming in to your account to pay your bills.