Dividend stocks can be among the most reliable safe stock investment choices. This is because dividend-paying companies provide cash to their investors on a regular basis, and usually these cash payouts grow each year as the business grows. In addition, dividend-paying companies are often basic and necessary. Johnson and Johnson (JNJ) provides healthcare products, Procter and Gamble (PG) provides useful consumer products like razors, and Smuckers (SJM) provides jelly, jam, peanut butter, and other foods.
During this past decade, the S&P 500, which is an index of some of the most profitable companies in the US, has not provided investors with any returns. It has been a “lost decade” for investors. On the other hand, companies like JNJ, PG, and SJM have continued to provide shareholders with a return on their investment.
Check out this comparison chart to get a visual example of what I mean. I picked a few well-known dividend payers and compared them over the past ten years with the S&P 500 index. Companies like PG, JNJ, SJM, and ED all had stock price appreciation that far exceeds the S&P 500’s lack of positive growth. And since most of these companies have higher dividend yields than the S&P 500 index, the difference in returns over this decade is even greater than the chart implies. And for good measure, I through into the chart a poor performer, AT&T (T). This company’s stock appreciation (or depreciation) underperformed the index, but with their huge dividend they might even be ahead in terms of returns.
You may be thinking that dividend companies outperform a bear market but underperform a bull market. There may be some truth to this in some instances, but in general if you invest in the best and brightest dividend-paying companies, this will not be the case. Consider this comparison chart to see a longer view of some of the companies above. Notice that even in long-term bull markets, dividend paying companies still hold their own. If this chart took into account dividends and dividend reinvestment, the difference would be even more dramatic, and the bottom companies of ED and T would look a lot brighter.
As a bonus, check out this comparison chart which compares BP to the S&P 500 index over this past decade. Even with this catastrophe, long-term investors haven’t fallen behind the index, and when their larger dividend is taken into account, they’ve surpassed it.
Of course, this doesn’t mean every dividend-paying company will do well, or that companies that don’t pay a dividend won’t crush the market. One look at Apple says quite a bit. But who could have known that Apple would suddenly take off like that? We’re not fortune tellers, we’re investors. Dividend-paying companies usually make it easier to identify long-term growers.
And perhaps the best part is that dividend growth investors don’t have too worry much about whether they are over or under-performing the market. What’s really important is the growing passive stream of income (actual CASH) that their dividends provide them. These payouts are produced by real business results, not by the whim of the market and the masses. From a young age all the way up through retirement, you can grow a huge pile of value that constantly provides passive income.
Full Disclosure: I own shares of JNJ, PG, and SJM at the time of this writing.
Great article Matt. I’d rather own a basket of dividend payers than the Index (or an ETF) any day.
It’s interesting you mention BP. BP IMO demonstrates why those seeking regular dividends by following a HYP or similar strategy should not put all their eggs in one or even a few baskets as another BP can damage your dividend yield pretty rapidly.
RetirementInvestingToday, I agree that any portfolio should be reasonably diversified so that any inevitable problems with companies do not drastically affect the whole portfolio.
Can you create a sample “Reliable Dividend Portfolio” in a future post?
A pinch of McDonalds, a dash of J&J and some P&G to taste.
I just found some of your articles today on the internet. I have been investing for almost 40 years; even though I read you have only been investing for 5 years, I like what I read about your investment philosophy and simple life-style.
I am not real agile with using the internet. Could you send me an email when you have a new article? I think I found you on Seeking Alpha.
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