First Published on December 24th, 2022 by Nikolaos Sismanis for SureDividend
Here at Sure Dividend, we are fond of dividend stocks, particularly stocks with long track records of consecutive annual dividend increases.
We believe that stocks like the Dividend Aristocrats, an elite class of 65 S&P 500 stocks with 25+ years of successive dividend hikes, have the potential to outperform the market over the long term – especially during uncertain times in the capital markets.
This idea was confirmed once again during the turmoil equities experienced in 2022. As you can see, the largest S&P 500 Dividend Aristocrats ETF (NOBL) outperformed the S&P 500 and the NASDAQ 100 by a wide margin.
“Dividends may not be the only path for an individual investor’s success, but if there’s a better one, I have yet to find it“
– Josh Peters
In this quote, Josh Peters suggests that collecting dividends from investments can be an important characteristic of an individual investor’s success. The idea expressed here is that collecting dividends is a dependable and effective way for individual investors to earn a return on their investments.
In fact, Mr. Peters suggests that dividends make for the ultimate route for investors to build wealth over time. It’s easy to trust his words, considering he has written one of the best dividend-investing books of all time, The Ultimate Dividend Playbook.
Dividends can provide a predictable source of cash flow, and thus, they can be exceptionally beneficial for those who are looking to build wealth over the long term.
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
– John D. Rockefeller
John D. Rockefeller was America’s first billionaire, with a fortune worth about 2% of the national economy.
In 1913, his personal wealth was estimated to be around $900 million, or about 3% of the country’s GDP of $39.1 billion that year.
Now, to say that dividends are the “only” way one gets pleasure would be abnormal, to say the least. Whether Mr. Rockefeller’s words are true or just a way for him to convey the importance of dividends through this exaggerated statement, the point remains the same: Dividends are a great way to build wealth.
When a company pays, or even better, increases its dividend payments, it can signal that its future outlook remains positive and that management is confident in its capacity to keep generating profits. Thus, regular dividend increases, in general, can be a cheerful sign for investors, as they can indirectly indicate a potential for an upsurge in the value of the company’s stock (i.e., building wealth over the long term.)
“A cow for her milk, a hen for her eggs, and a stock, by heck, for her dividends“
– John Burr Williams
In this quote, John Burr Williams uses the analogy of a cow, a hen, and a stock to illustrate the importance of dividends for investors. Just as a cow is valuable for the milk it produces and a hen is valuable for the eggs it lays, a stock is valuable for the dividends it pays.
In other words, stocks don’t really have value unless investors can receive a real, tangible return on their investment through regular payouts. The statement also implies that non-dividend-paying stock can be quite more speculative, as the lack of dividends can make it significantly more difficult for investors to assess a stock’s future total return prospects.
“The very attention we place on rising dividends puts us squarely in the position of ‘owners’ of a company, of true investors who understand that a satisfying and reasonable return from a stock investment isn’t a gift of the market or luck or the consequence of listening to some market maven, but it is the logical and inevitable result of investing in a company that is actually doing well enough, in the real world, to both pay dividends and to increase them on a regular basis“.
– Lowell Miller
Lowell Miller is no stranger to the investing world. He has written an excellent book titled The Single Best Investment: Creating Wealth with Dividend Growth, in which he urges prospective investors to avoid listening to the noise diverting the markets but rather allocate their money to dividend-paying stocks that offer stable returns and reduced risk characteristics.
His quote emphasizes the significance of thinking like a business owner when holding a stock, which can be essential for three key reasons:
- •Long-term focus: Business owners typically focus on their business’s long-term growth and success rather than short-term market fluctuations. By thinking like an entrepreneur when owning a stock, investors can take a similar long-term view and make decisions based on company fundamentals rather than short-term market movements.
- •Diversification: Business owners commonly diversify their investments to spread risk and increase their chances of success. By thinking like a business owner when owning a stock, investors are more likely to diversify their portfolio and reduce risk.
- •Research and Due Diligence: Business owners typically do extensive research and due diligence before investing in a business. Thinking like an entrepreneur when owning a stock encourages investors to conduct their own research and due diligence to make informed investment decisions.
Lowell Miller suggests that investing in companies that are able to pay and grow their dividends regularly constitutes good investment practice.
“The good thing about the dividend-paying stocks is, first of all you have stocks, which are real assets if we have some inflation. I think we’re going to have 2%, 3% maybe 4%. That’s a sweet spot for stocks. Corporations do well with that. It gives them pricing power. Their assets move up with prices. I’m not fearful of that inflation.”
– Jeremy Siegel
Mr. Siegel’s quote essentially points to the fact that investing in dividend-paying stocks can be a suitable strategy in the event of inflation – and during highly-inflationary environments in general. This theme is more relevant than ever, as inflation remains quite elevated, despite unwinding lately. The annual inflation rate in the U.S. stood at a lofty 7.1% in November of 2022.
Inflation is fundamentally a constant expansion in the general price level of goods and services in an economy over time. And since dividend-paying stocks are real assets paying out real, tangible assets (cash or stock), they can provide a steady source of income that can assist in mitigating the effect of climbing prices.
A good example here includes consumer staple stocks, like The Procter & Gamble Company (PG), Colgate-Palmolive Company (CL), and PepsiCo, Inc. (PEP), which have managed to increase the prices of their goods by a rate that is more or less equal to the rate of inflation lately. This is due to their highly inelastic goods as they comprise household essentials that consumers tend to buy regardless of the underlying state of the economy.
Therefore, Mr. Siegel’s quote also indicates that moderate inflation can even be a favorable factor for companies, as it can give them pricing power, which can result in their assets appreciating in value.
“I believe non-dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it.”
– Mark Cuban
In this quote, Dallas Mavericks owner Mark Cuban suggests that the value of non-dividend stocks is subjective. If a stock doesn’t pay dividends, it’s way more problematic to value them, making it hard to tell whether you are paying a fair price when buying them.
The primary reason that non-dividend-paying stocks may be harder to value is that they do not offer a predictable income source like dividend-paying stocks. This means that it can be harder to determine the value of non-dividend-paying stocks based on traditional valuation methods, such as the dividend discount model, which is typically used to value dividend-paying stocks.
Non-dividend-paying stocks can also be harder to value than dividend-paying stocks because their value is predominantly helmed by the company’s growth potential, which can be tough to predict. For this reason, such stocks are more sensitive to market fluctuations and overall more volatile and speculative than dividend-paying stocks, as Mr. Cuban suggests.
Final Thoughts
All these quotes we discussed stress one thing: the importance of dividends when investing. Amongst other points, they teach us that dividends are a critical contributor to a stock’s total return, including their role in the appreciation of the stock price and the income they generate.
The quotes also underscore the significance of dividends in inflationary environments, their power to help investors value stocks more accurately, and that they also expose whether a company is in a healthy financial position.
This article was first published by Nikolaos Sismanis for Sure Dividend
Sure dividend helps individual investors build high-quality dividend growth portfolios for the long run. The goal is financial freedom through an investment portfolio that pays rising dividend income over time. To this end, Sure Dividend provides a great deal of free information.
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