Let’s talk dividends! It could be worse as I could be talking about taxes.
I came across an article recently that was talking about returns with and without dividends and it made me realize I should revisit this topic. So, here goes.
First off, what is a dividend? Simply, it is a payment from a company to shareholders. Dividends should be regular payments, but sometimes companies shut them down temporarily. Regardless, I am talking about normal dividends. Also, for this article I am focusing on dividends from the S&P500.
The article was comparing the returns of the S&P500 with and without dividends. In my world, that is called Total Returns and Price Returns. Let’s look at some of the findings.
- The first period we are going to look at is from 1928 through 2022. Please ignore the fact the S&P500 did not officially exist as an index until 1957. During this near century, the S&P grew 21,500% with an average annual return of 5.8%. This is simply the Price Return. If you had reinvested the dividends from the S&P500 for this period the returns really accelerate. These Total Returns become growth of 750,000% with an annual average of 9.9%.
- The above numbers show a roughly 35X higher return for Total vs. Price.
- $1 invested in the stock market in 1928 would be worth $216 Price Return the end of last year. That same $1 would be worth $7,500 with dividends reinvested for Total Return. Not too shabby.
- Since I do not know anyone who has been investing for nearly 100 years, let’s look at more recent data. Over the last 30 years the S&P has averaged Price Returns of 7.5% and Total Returns of 9.6%.
My point with everything above – it may be time to consider reinvesting your dividends, if you are still investing.
Reinvesting your dividends is easy to do now. You simply set up a DRIP. Dividend Reinvestment Program. I am highly confident every custodian allows you to automatically reinvest your dividends as long as you enroll in a DRIP.
Now, if you are no longer investing, you may wish to take these dividends in cash. This makes total sense.
One thing I want to mention is to be aware there are taxes with dividends. Uncle Sam will come a knocking.
Over the years I have seen all kinds of approaches with dividends. From investments that are focused on companies that pay the highest dividends to those that increase them every year to those that never generate them as they would rather focus on Price Returns and avoid immediate tax implications. I am not here advocating one position over the other. Just to have you recognize the power of dividends.
And before I forget and someone gets wound up – yes, dividends come to play with fixed income/bond investments. Better known as yield or coupons. However, I am not here to talk about bonds.
Another item to share is something I read in someone’s LinkedIn post about passive investing. It was someone who owns a few rental properties. He was lamenting a recent incident and a big, unplanned expense with one of his rentals. The short version is he was commenting about how passive income from dividend investing might make more sense for many people than income from rentals. Again, not saying one approach is better than another, just that dividends from investing can provide some nice passive income.
Ultimately, the thing I hope you take away from this is to at least check your investments to see if you are set up with a DRIP, assuming you wouldn’t mind growing your investments instead of getting cash in hand.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.