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 you 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.
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 is very much consist 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 overall performance of my portfolio ?
I have done a quick check on my investment in 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 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 dividend yield of around 3.1 %. If we factor that in , there is still a whooping 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/SinTel ) 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 aspect of finance analysis e.g FCF / Pay out Ratio / Debts to Equity Ratio etc …
“Dividends were de-emphasized in the 1990s, but after the dot-com bubble burst, investors once again turned their attention to dividends.” From Morningstar