Let Dividends Help You Crush the Market

Writing for SmartMoney, the always-sharp Jason Zweig presented what has to be the easiest way to beat the market using dividends. All you have to do is invest in dividend-paying stocks and then completely ignore the impact of dividends on your benchmark.

In his article, Zweig names some names, and I'm guessing it had to be pretty painful to be on the receiving end of that data-gotcha pantsing. But I won't repeat the names here because, frankly, I was nearly taken by the same thing when writing this article a month ago.

I think it's a fairly easy issue to overlook because on a day-to-day basis we talk constantly about the S&P 500 index -- the very measure that Zweig highlights as taking no account of dividends. Rare is the day when you hear anybody mention the S&P 500 Total Returns, which is the measure that does take dividends into account.

As I've pointed out on a few occasions, until recently I think people had simply begun to look at dividends as outmoded -- a thing of the past like silent movies and leisure suits.

But I've continued to pound the table on exactly why investors shouldn't be ignoring the power of dividends, and the table below shows what I believe is one of the most interesting "convincers" of all. The data below correspond to the returns for all U.S.-listed stocks with a market cap above $500 million as of January 2000 for the period January 2000 to January 2011.

 

Average Return

Median Return

All stocks

92.9%

22.4%

Stocks with a dividend greater than 3%

109.4%

54.4%

Stocks with no dividend

69.9%

(19.6%)

Source: Capital IQ, a Standard & Poor's company.

Ready for the part that will really blow your mind? That is stock price change alone -- it does not include the impact of dividends on the returns. So even without considering the cash rolling in from dividend payments, dividend investors still beat everyone else over the past 11 years.

Not only are there plenty of stocks available to choose from today with a dividend yield of 3% or better, but there are some really great stocks that fit this description. Here are just a few.

Company

Dividend Yield

Abbott Laboratories (NYSE: ABT  )

3.8%

Procter & Gamble (NYSE: PG  )

3.2%

Johnson & Johnson (NYSE: JNJ  )

3.5%

Kimberly-Clark (NYSE: KMB  )

4.2%

Consolidated Edison (NYSE: ED  )

4.6%

Source: Standard & Poor's and Yahoo! Finance.

Why these companies in particular? Because not only do they all have dividend yields in excess of 3%, but they're all on S&P's Dividend Aristocrats list, which means they've not only paid, but also increased their dividend for at least 25 consecutive years.

The bottom line here is if you're trying to calculate whether your portfolio is beating the market or you're trying to construct a market-beating portfolio, do not overlook dividends.

For more dividend ideas, check out The Motley Fool's free report featuring 13 high-yielding dividend stocks.

The Motley Fool owns shares of Abbott Laboratories and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Procter & Gamble, Kimberly-Clark, and Abbott Laboratories. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Abbott Labs and Johnson & Johnson, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (4) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 10, 2011, at 12:12 PM, johndunk wrote:

    When this analysis at the topmost chart refers to a stock that pays dividends does it refer to one that pays dividends now, or paid dividends at the start of the study period? (Jan 2000) My concern is that there is a selection bias there of course - companies that offered no dividend in their growth stage 10 years ago but have now shifted to having a dividend. ex:Microsoft. Thanks!

  • Report this Comment On June 10, 2011, at 3:44 PM, TMFKopp wrote:

    @johndunk

    The "3% group" paid a 3% dividend as of 1/1/2000.

    Matt

  • Report this Comment On June 11, 2011, at 8:58 AM, KCinAustria wrote:

    Hi Matt,

    I'm not disputing the importance of dividends on long term returns, but...

    I think your choice of dates for the analysis could seriously skew the results, and here's why:

    1) Analysis started on Jan 1 2000, when many non-dividend paying tech companies were at ridiculously high, near-peak-bubble levels

    2) Analysis ended on Jan 1 2011, when, well...dividend paying stocks may not be in a 'bubble' per se, but they are surely fashionable, just judging by the incredible number of articles about them--on this site and others.

    I'd be curious to see how the numbers change, if you change the dates of your analysis. (For example, trying periods 99-09, 00-10, 01-11, 02-11, 03-11, etc or even starting earlier, to include more 10 year blocks.)

    I think Morgan (Housel) made a pretty convincing arguement for the importance of dividends in one of his articles showing historical chart data (for the last 100 years or so) of stock market returns without dividends vs. inflation, and stock market returns with dividends (reinvested) vs. inflation.

  • Report this Comment On June 11, 2011, at 9:07 AM, KCinAustria wrote:

    The article I was referring to is: The Extraordinary Power of Dividends, link below:

    http://www.fool.com/investing/general/2011/03/08/the-extraor...

    One interesting factor (mentioned in a comment on the Housel article) is that the tax implications of dividends are not included in the Housel analysis.

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