The Power of Dividend
In stocks investing, you probably heard about the “ growth stocks “, “dividend stocks “ , “large-cap / mid-cap “ or “ blue chips “ etc .. and depending on your “desired and expectation” of the ROI of your investment, you may choose what kind of stocks to be included in your portfolio.
For most of the investors, I am sure you would have included some “income stocks “ into your portfolio as part of the diversification and also hopefully dividends can keep the value of your investment rising even when market performance sours.
The Power of Dividends :
According to research from Morningstar, dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1960, 81% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding, as illustrated in FIGURE 1.
|image credit to Morningstar.com|
Below quoted from J.P Morgan Asset Management :
The power of dividends and compounding
Further reading on “ The Power of Dividend “
The Power Of Dividend Growth ( from Investopedia )
The Extraordinary Power of Dividends ( from The Motley Fool )
Proof that you can't afford to ignore the power of dividends ( from The Telegraph )
“ Power of Dividend “ on STE’s Portfolio
As you may know that my portfolio very much consists of “dividend stocks “ like REITs / Business Trust / Telco and Banks and I am depending on dividend income to survive for the past 3 years, hence the dividend is very important for me.
How about the impact of dividend on the overall performance of my portfolio?
I have done a quick check on my investment in the Singapore stock market since 2008 :
Total Return XIRR ( including dividend ) = 18.4 %
What happen if I exclude the dividend income, total XIRR would drop to 7.2 % only. Wow! that’s a huge gap of 11.2 % lower if dividend being excluded, but of course, this might be too extreme as in any case, STI index still giving a dividend yield of around 3.1 %. If we factor that in, there is still a whopping 8% different base on my “dividend income “ investing strategies.
Initially I was wondering why there is such a big gap and could it be because of my loss of around -$84,333 (paper + realized, excluding dividend ) in investing in 3 O&Gs ( SMM/SCI/Keppel Corp) and 3 Telcos ( M1/StarHub/SingTel ) which made XIRR without dividend worse than expected.
But even if I exclude these 6 stocks in my analysis, the XIRR only improved marginally by 1 % only to 8.2 %, as such I would conclude that dividend play a bigger role in my journey of wealth accumulation and overall portfolio’s performance.
How about you? any idea what will be the impact of dividend in your portfolio’s performance? mind to share if you have.
PS : Don’t just invest base on yield and beware of “value trap “ in chasing yield only stocks, please also look at other aspects of financial analysis e.g FCF / Payout Ratio / Debts to Equity Ratio etc …
Quote Of The Day :
“Dividends were de-emphasized in the 1990s, but after the dot-com bubble burst, investors once again turned their attention to dividends.” From Morningstar