While many investors chase high-growth stocks in an attempt to build wealth quickly, dividend investors understand that by harnessing the power of dividends over time, it’s possible to build long-term wealth with lower volatility. Not convinced? Take a look at the chart below.
Dividend stocks vs non dividend stocks
Statistics: Ned Davis Research. Chart: Dividend Wealth
Analysts at Ned Davis Research analysed US dividend stocks vs non dividend paying stocks between 1972 and 2014. What they found is quite staggering and will no doubt surprise a few people.
The research showed that during that time period, US companies that grew their dividends or commenced paying dividends generated annualised returns of 10.1% per year. The standard deviation of these returns, or in laymen’s terms, the risk, was 16.0%. These stocks generated a higher return than the S&P 500 dividend stocks subset, which generated annualised returns of 9.3% with standard deviation of 16.8%.
In contrast, the non dividend paying stocks in the S&P 500 returned an underwhelming 2.6% per year during the period. That’s clearly a much lower return than both sets of dividend stocks generated. Furthermore, the standard deviation of the non dividend paying stocks was considerably higher at 25.1%. In other words, the non dividend paying stocks were much more volatile than the dividend paying stocks.
Now obviously there’s no guarantee that stocks will perform like this in the future. Furthermore, it’s worth noting that this research was US based, and UK stocks can behave very differently to US stocks. However, that said, this research suggests to me that by focusing on companies that have a consistent track record of increasing their dividends, investors give them themselves a good chance of generating superior returns over the long term, with less risk.
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.