When market conditions are volatile, and inflation starts to bite, companies that could demonstrate potentially defensive qualities, relatively strong free cash-flow and the potential to pay and grow their dividends become an investment option that worth investors to consider.
Unleash the power of dividends of US stocks
The chart below shows that income, dividends and the reinvestment and compounding of those dividends from US stocks have contributed considerably to a long-term US equity investor’s total returns, and, in many cases, have exceeded the gain from capital returns alone. Thus, we believe that it is worthwhile for long-term investors to consider investing in US equities for a potentially sustainable and growing income.
The long-term returns from US equity markets illustrate the influence of dividends on wealth creation. To the long-term investor, equity returns are derived not simply from the receipt of dividends but from the accumulation of shares as a result of the reinvestment of those dividends. The compounding of investment returns via dividend reinvestment can be a powerful driver of equity returns over the long term.
The chart below illustrates, for example, that capital gains accounted for the growth of USD1 invested in US equities at the beginning of 1900, to USD575 at the end of 2019. However, the additional effect of dividend and its reinvestment turned that original investment of USD1 into USD73,000. Accordingly, dividends and their reinvestment accounted for 99% of US equity returns over the period.
Impact of dividends, United States, 1900-20191
For illustrative purposes only.
Note: 1Bespoke US stock index, Prof Robert Shiller, Yale University, August 2020
Source: Prof Robert Shiller, Yale University, August 2020
There is no guarantee that dividend-paying companies will continue to pay, or increase, their dividend.
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Past performance is not indicative of future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment, you may get back less than you originally invested.
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