POINT
Stock Dividends Still Matter; Low Payouts Are A Danger Sign
Are remarkably long, strong bull market has led stock investors to underrate dividends.
The Wilshire 5000 Total Market Index has recorded average annual returns of about
17% over the past 20 years, so many investors are focused only on capital gains, not on
dividend income. Here are three reasons investors should care about dividend yields.
1. Dividends are a bird in the hand.
A stock investor can make money in only two ways receiving dividends or selling shares
at a profit. Dividend payments are pretty reliable and they're real- you can spend them or
reinvest them. In contrast, price appreciation is far from certain. With stock prices very
high by historical norms in relation to such fundamentals as earnings and net worth,
further gains may be hard to come by. The great bull market of the 1980s and '90s and
the economic expansion that began way back in 1991 won't continue forever. In a
downturn, the joy of dividends will be rediscovered,- they can help investors , "stay the
course" while waiting for prices to rebound. And for investors who hold stocks in
tax-deferred accounts, such as IRAs or 401 (k)s, dividends and capital gains are
ultimately taxed at the same rate.
2. Dividends are a signal.
Economic studies generally have found that dividends are a signal from corporate
managers that they have confidence in their company's future. Because dividend
reductions are typically very damaging to a company's stock price, companies usually
don't institute or increase a dividend unless they feel sure the company's earnings will
support the payments.
3. Dividends are key in total returns.
Vanguard calculates that from 1925 through 1999, dividends were responsible for
two-fifths of the 11.2% annual average total return on the S&P 500 Index (4.7% of the
11.2% return). Even in the roaring '90s, dividends contributed significantly to returns.
Dividends, together with the compounding effect of reinvesting them, accounted for 3.1
percentage points of the 16.9% annual average return of the Wilshire 5000 Total Market
Index during the 1990s. And for millions of retired investors who count on them to help
pay their living expenses, the importance of dividends is obvious.
Source: "IN THE VANGUARD" , Winter 2000