Dividend-Focused Strategy
Investors focus on total return when investing, not just capital appreciation or income. Although capital appreciation may at times provide the bulk of total returns, income has contributed its fair share as well. A broad equity index for all decades from 1871 to 2010 had an annualized total return of 8.8 percent over the entire period; the income component was 4.6 percent (52.3 percent of the total). The income component of total return was not only greater than the capital appreciation, but also significantly less volatile. The income component ranged from 6.4 percent to 1.9 percent, annualized over the 10-year periods. However, price appreciation was as high as 14.9 percent and as low as -2.8 percent. This wide range is unfavorable for investors when compared to the income component, which can never be negative.
Figure 1 assumes if you bought one share of the S&P 500 Index on December 31, 1969, it would have cost you $92.06. In each subsequent year you chose to spend the dividends rather than reinvest them. In 1970, you would have received dividends totaling $3.14, for a 3.41 percent yield on cost; by 1980, your annual dividend would have increased to $6.16, for a 6.69 percent yield on cost; in 1990 you would have received $12.09, for a 13.13 percent yield on cost; and in 2011 you would have received $26.43, for an attractive 28.71 percent yield on cost. In fact, the average annual increase of the dividends over the entire 44-year period was 6.06 percent. This growth in dividend cash flow that occurred in the broad S&P 500 Index, with no dividend reinvestment, piqued our interest relative to its potential impact on a retirement portfolio in distribution.
We purchased a Standard and Poor’s database of monthly returns for the top 20 percent of dividend-paying companies in the S&P 500 Index (hereafter, the S&P Top 100 Dividend Payers). This database begins in 1968, is equally weighted, and provides returns through the present. Performing an initial comparison of the S&P Top 100 Dividend Payers to the S&P 500 Index reveals the characteristics shown in Table 1.