Investing for total return: The importance of dividends
February 2009
"I shall remember that check as long as I live. ... It gave me
the first penny of revenue from capital — something that I
had not worked for with the sweat of my brow. 'Eureka!'
I cried. 'Here's the goose that lays the golden eggs."1
— Andrew Carnegie, recalling the first dividend payment he received from an investment in stocks
Though often hidden in the background, dividend income is an important contributor to a stock's total return. Of course, price appreciation is important too, and it certainly receives plenty of attention. But the influence of dividends should not go unnoticed.
In the popular book The Future for Investors, University of Pennsylvania finance professor Jeremy Siegel analyzed the stock returns for all the companies in the original S&P 500 Index (an index often used to represent performance of the U.S. stock market), beginning with the index's genesis in 1957 and ending in December 2003. He found that the highest returns did not come from a traditional growth stock. Instead, the highest annualized returns were achieved by an established, dividend-paying company that operated in a relatively stable industry. The analysis revealed that the bulk of the company's stock price appreciation was attributable to the company's long historical track record of making consistent dividend payments.
The study also demonstrated that stock price appreciation, while certainly important, does not ensure a competitive total return. By virtue of their dividend payments, stocks of slower-growth companies may have the potential to eclipse those of companies with higher growth rates.
Taxes and downturns: Two more reasons to keep dividends in mind
There has always been a strong case for investing in dividend-paying stocks, but here are two points that we believe make the case even clearer.
The Jobs and Growth Tax Relief Reconciliation Act of 2003, signed by President Bush in May of that year. For many investors, the Act reduced the maximum tax rate applied to dividend income, providing new motivation to seek investments that make steady dividend payments. (Note: All provisions within the Act are subject to revision — or possibly suspension — at the end of 2010. While we can't predict what will happen to each provision, we encourage investors to be mindful of legislative developments like this one, as they can often affect the earning power of dividends.)
The credit crunch and the resulting challenges within U.S. financial markets. When investment conditions become as volatile as they have in recent quarters, regular income from dividends may help offset losses in weaker areas of your portfolio.
Some may argue that investing in mature, dividend-paying companies may not be as exciting as trying to find the "next" big growth stock. We remind investors, however, that the power of dividend-yielding investments should not be ignored. With the long run in mind, it may be wise to talk to your financial advisor about considering a suitable way to include dividend-paying stocks in your investment portfolio, while being mindful of possible tax implications.
Important notes about risk
Investing involves risk, including the possible loss of principal.
Carefully consider the Funds’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses, which may be obtained by clicking here or calling 800 523-1918. Investors should read the prospectus carefully before investing.
1 David Nasaw, Andrew Carnegie (New York: Penguin Press, 2006).
Information in this article is not and should not be construed to be financial advice.
Delaware Investments refers to Delaware Management Holdings, Inc. (DMHI) and its subsidiaries. Macquarie Group refers to Macquarie Group Limited (MGL) and its subsidiaries and affiliates worldwide.
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