Many investors overlook the importance of dividends when investing in the stock market.
Ask your average investor, or even your average financial advisor, about the contribution that dividends make to total investment returns, and they will probably reply somewhere in the region of 30-40%.
However, studies have shown that in the long-term, the contribution from dividends is much higher than that. Indeed, some studies have shown that over the long-term, dividends contribute up to 80% of long-term stock market total returns.
FTSE 100 returns
Let’s examine the FTSE 100.
According to figures from Bloomberg, over the 10-year period to the end of 2016, the FTSE 100 index returned just 15% without dividends. That’s a pretty underwhelming result. However, add in the reinvestment of dividends and the total return jumps to 67%.
In other words, reinvested dividends generated 78% of the FTSE 100’s total return over ten years.
Looking at the index over a 20-year period it’s a similar story.
Over the 20 years to the end of 2016, the FTSE 100 returned 73% in capital appreciation terms. However, add in the reinvestment of dividends, and the total return jumps to 214%. Over this period, reinvested dividends contributed around 66% of total returns.
And if I pick out a five year time frame that included the Global Financial Crisis, the results are even more extreme. For the five years to the end of 2010, the index returned just 5%. However, with dividends reinvested the return jumps to 29%, meaning that dividends made up a huge 83% of total returns.
It’s clear to see from these results that dividends have contributed a very high proportion of total investment returns from the FTSE 100 index in the recent past.
So why do so many investors ignore dividends?
Yet still, many investors continue to ignore the power of dividends. Why? There are several reasons.
It’s a topic I explore in more detail here.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.