Experienced investors know that over long holding periods, dividends represent a significant percentage of total returns.
That’s particularly true when investors don’t need dividend income right off the bat and can reinvest those payouts, allowing that cash to compound over time. On a related note, compounding and long-term time frames are among the reasons why investors should prioritize dividend stability and quality growth when evaluating dividend stocks and exchange traded funds.
“Dividends play an important role in generating equity total return. Since 1926, dividends have contributed approximately 32% of total return for the S&P 500, while capital appreciations have contributed 68%. Therefore, sustainable dividend income and capital appreciation potential are important factors for total return expectations,” according to S&P Dow Jones Indices.
There are positive signals in dividend increases, and the longer those raises arrive, the better it is for long-term investors. For example, consistent dividend hikes can be signs of a management team that’s aligned with shareholders’ interests.
“Companies use stable and increasing dividends as a signal of confidence in their firm’s prospects, while market participants consider such track records as a sign of corporate maturity and balance sheet strength,” adds S&P Dow Jones.
Bolstering the case for dividends, particularly for risk-averse investors, is volatility. Dividend growth stocks are historically less volatile than stocks that don’t pay or grow dividends. Regardless of age range, that’s a positive point for all investors to consider.
“In recent years, the increasing amount of academic and practitioner research demonstrates that dividend yield is a compensated risk factor and has historically earned excess returns over a market-cap-weighted benchmark. When combined with other factors such as volatility, quality, momentum, value, and size, dividend yield strategies can potentially offer exposure to systematic sources of return,” notes S&P.
Investors have an array of options to consider when searching for quality dividend growth strategies. This is an investment concept where active management can serve investors because, try as they might, not all payout indexes can ensure that all components will continue producing dividend growth, and some indexes may be home to companies that are vulnerable to negative dividend action.
One idea to consider is the SmartETFs Dividend Builder ETF (DIVS), which is actively managed and mixes domestic and international dividend stocks. Investors looking for an ex-U.S. on a quality dividend region may also want to consider the SmartETFs Asia Pacific Dividend Builder ETF (ADIV).
For more news, information, and strategy, visit the Dividend Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.