First you have to know about dividend growth investing and understand how dividend growth builds wealth. Second you have to believe it works. I hope this page helps. Third you have to resist the temptation of 'story' stocks, to control your behaviour and finally you need the patience to execute the strategy (to wait for the value buy price, and then wait for the dividends to grow). Nothing spectular will happen in the short term. Good luck.
64% HIGHER: If you still need to be convinced that dividend stocks are the way to go, relish this datum: “during a five year holding period any time between January 1977 and December 2005, median returns from dividend-paying stocks were 64 per cent higher than non-dividend stocks” ROB May 24 2008
http://money.cnn.com/magazines/fortune/fortune_archive/1990/10/29/74265/index.htm
9.5% more: “dividend-paying stocks on the S&P/TSX [Toronto]composite index have returned about 13.7 per cent a year over the past 20 years, while non-dividend-paying stocks produced an annual return of only 4.2 percent” Yin Luo, CIBC
19.6% a year: Canadian dividend stocks which increased their dividends once a year, returned 19.6% a year (that's annually) in the decade ending December 2006. At this rate, money doubles every five years. Is your money in mutual funds doubling that often?
12.2%: In 2007, our own Canadian dividend income increased 12.2%. When was the last time you had a 12% raise? Increasing income in retirement is terrific. Bonds and GICs are fixed income investments. I don't buy bonds or GICs. Anyway, bonds are in a bear market now…interest rates (ten year treasuruies) bottomed in 2003.
DIVIDENDS PROVIDED 90% OF THE RETURN: Total Return is the sum of two elements: price change and income. In the three range bound markets last century, dividends provided 90% of the return. The average price change was 0.7%, the dividends yielded 5.3% so the total return was 5.9%. I obtained this data from Chapter 3 of Vitality Katsenelson's Active Value Investing - Making money in Range-Bound Markets. We could be in a range-bount market right now. More detail about this S&P 500 data was in my June 2008 report.
8.6% MORE! From 1972 though to 2006 dividend-growing stocks returned 11% a year. Non-dividend payers returned 2.4% annually. Ned Davis Research © TCR personal use only.
The engineer from Victoria who got me started in dividend growth investing retired in 1967. The income from his $92,000 portfolio of Canadian dividend stocks in his first year of retirement was $4,815*. By 1984, when he wrote a letter-to-the-editor of the Financial Times outlining his retirement investment strategy, his income had grown to $31,398. His capital grew too: from $92,000 in 1968 to $533,000 by 1983. Part of this gain was the addition of $122,000 in new money. The 1970s did not provide stellar returns to mutual fund holders nor index investors (TSE 300 index reached 1,200 in 1968: it did not break out above 1,200 for good until 1978. GULP!) Canadian dividend growth stocks, though, did well through this range-bound market. (More detail in my August 2008 report and TCR of August 2004 and the Connolly Report of February 1987) Subscribers get the links. *about my salary at the time
“the dividend income of the FTSE All-Share (the broad-based British index) has almost doubled in the five years [since 2003] The Economist July 17 2008
“Since the end of the 1990s, dividends have accounted for all the markets [S&P 500] gains…” New York Times, August 24 2008
$163,000 more: “Since 1979, dividend-paying stocks have outperformed nondividend payers by 2.16 percentage points a year, based on total return. Had you invested $10,000 in 1979 in the dividend payers, and reinvested the income along the way, you would have wound up with $406,825 by August 15 this year [2008]. That same $10,000 in nondividend paying stocks would have grown to just $243,385 - a difference of $163,000.” N.Y. Times August 24 2008
VALUE INVESTING: “Passive investment or active growth management? Value beats them both” was the title of George Athenassakos' column in the Report on Business of September 22 2009. In it, Professor Athenassakos reports, on a study he, and some HBA and MBA students, carried out at the University of Western Ontario. They “found that actively managed value investing outperformed both index funds and active growth management.” They used Canadian data from 1985 to 1998 and 1999 to 2007. They formed quartiles with the stocks and sorted by P/E and then price to book. “The average annual return of the truly undervalued portfolio”, Professor Athenassakos says, “was 14.2 per cent in 1985-98 and 34.5 per cent in 1999-2007.” And what kind of investing do we do? Value…YES! I decided, years ago, to use use dividend yield to select value stocks, rather than P/E or price to book. Our results are similar. Is it ever nice to find Canadian data and to confirm yet again that we are on the right track. My favourite value investing book is: Greenwald, Bruce et al. Value Investing: from Graham to Buffet and Beyond.
This Athenassakos data, his full paper, is available at the Richard Ivy School of Business, the Ben Graham Centre site, but it costs. Better first to read his summary in the Report on Business and print yourself a copy while it is still available. ♣ TC: You noticed, of course, the difference in return during the two periods: 14.2% and 34.5%. Why the difference? Value stocks tend not to do as well during roaring bull markets. 1985 to 1998 what such a period. Value stocks tend to do much better when the market is not excited. Hence the 34.5% in the period after the tech crash in 2000. Going ahead, I do not expect a roaring bull market, although with the results from March 2009 to late September 2009 as I key this, it's is hard to tell. As a result, I expect value stocks to do well again in the slow growth (protracted slog) years ahead.
http://www.bengrahaminvesting.ca/