Why dividends matter


John D. Rockefeller – one of the wealthiest men who ever lived – once said that the only thing that gave him pleasure was to see his dividends coming in.

That’s a strong statement. But if Rockefeller meant it, he must have truly been the happiest man in the world. Rockefeller was the founder and majority of Standard Oil, which was the predecessor of both ExxonMobil (XOM) and Chevron (CVX).

He insisted that two-thirds of the annual profits of the largest energy monopoly in history be paid out in dividends. That’s a lot of income rolling in every quarter.



Income Stream

For most investors, a dividend is simply a check that arrives in the mail every quarter (or more likely gets posted to their brokerage account).

Getting a regular stream of income allows you to realize regular profits along the way without having to sell your stock.


Deeper Meaning

But dividends are about more than just income. They’re about being a better kind of company. Earnings can be manipulated. Even sales can be manipulated. But dividends have to be paid in actual cash. There’s no amount of dodgy accounting that can fake cold, hard cash.

Furthermore, knowing that cash has to be on hand to pay dividends forces management to be more disciplined.

They are less likely to burn shareholder money on expensive vanity projects when they know they might need that cash to fund the dividend next quarter.

They’re also less likely to dilute their shareholders with stock-based employee compensation or secondary stock offerings, as they’d have to pay dividends on any new shares created.


High Performers

Some might argue that initiating a dividend is an admission by management that the company’s best growth days are behind it.

But as Sonia Joao, President of Houston-based RIA Robertson Wealth Management explains, “Paying a dividend doesn’t suggest slower growth ahead. If anything, it’s the exact opposite. Precisely because the company expects durable growth, they’re more willing to part with their cash.”

Dividend-paying stocks have been proven to outperform their non-paying peers over time, according to my research.

Research Ned Davis Research showed that the equally weighted S&P 500 index enjoyed a compound annual growth rate of 7.70% over the 1972 to 2017 period.


Takeaway

But breaking the index down gave very different results. The dividend payers collectively enjoyed returns of 9.25% per year, while the non-payers lagged with returns of just 2.61%.

Even better, stocks that initiated or grew their dividends fared best of all, enjoying compound-annual returns of 10.07% per year.

So, not only do dividend stocks put a little change in your pocket every quarter. They also improve the performance of your portfolio.

If you’d like to see what dividend-paying stocks that I’ve invested in, please go here and keep reading.


Photo Credit: Ken Teegardin via Flickr Creative Commons

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Charles Sizemore
Charles Sizemore
Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the founder and Chief Investment Officer of the firm.