Many studies have shown that dividends make up a significant proportion of total investment returns over the long term. Indeed, looking at the FTSE 100 for the ten year period to the end of 2016, the index returned just 15% without dividends, but 67% when dividends were included and reinvested. That’s a fairly significant difference.
So it’s pretty clear that dividends are important when it comes to generating long-term wealth from the stock market.
Why then, do so many investors ignore dividends?
Lack of understanding
One possible reason is a lack of understanding about just how powerful dividends can be. Most investing books focus on the ‘buy low, sell high’ mantra and really don’t pay that much attention to dividends. As a result, many investors don’t understand the benefits of reinvesting dividends over the long term to capitalise on the power of compounding.
Another issue is that way too many investors approach the stock market with the aim of getting rich quickly. Let’s face it, a growth stock that could double or triple in price within weeks, does sound more exciting than a boring mature company that yields 4%. However, experienced investors understand that the exciting growth stock is generally going to be significantly more volatile than the dividend stock.
Lastly, professional portfolio managers are often simply not granted the time to capitalise on the benefits of long-term dividend growth investing. Having worked in the institutional investment world, I’ve seen first-hand how short sighted the industry is.
The problem is that portfolio managers are generally judged on their short-term performance. If the portfolio manager underperforms the benchmark on a one or three-year basis, they could lose their job. So the focus becomes largely about trying to beat the market in the short term.
Dividend investing however, is a long-term play. The results over one or three years are unlikely to be eye-catching. But over a period of ten years or more, when exponential compounding really starts to kick in, the results can be powerful.
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.