Dividends have historically accounted for 33% - 40% of historical annual total returns.
This is the beauty of averages however.
During long bull markets, dividends are outshined by capital gains. Examples of long bull markets include the ones seen in the 1920s, 1950s and 1960s, 1980s and 1990s and then the 2010s and 2020s.
Investors during those long bull markets see dividends as irrelevant during those periods.
However, during those long cyclical bear market stretches, dividends tend to account for 100% of total returns.
Those long stretches of time include the:
1929 - 1954
1966 - 1982
2000 - 2012
During those long stretches of time, investors are reminded that while annualized total returns are roughly 10%/year, those returns are just averages. You can spend many years with no capital gains to show (in a diversified portfolio), during which time dividends are the only source of return you will get.
This is why I focus my whole strategy around dividends - these payments help me stay invested through the ups and downs, because I get cashflow that comes from corporate profits. These are much more stable and predictable than share prices (in the short and medium and long run).
I went ahead and obtained a chart of S&P 500 index on a real price return basis. It shows the price of the S&P500 index since 1871, but adjusted for inflation.
You can see that while stock prices have tended to go up over time, there have been long stretches of time when they didn't. Notable examples include the 1910s, when we had the Great War.
The next example is the 1929 - 1954, when we had the Great Depression and World War II.
The third major example is the 1966 - 1982, when we had high inflation, and high interest rates. Some economists refer to the 1970s as a staglation - low economic growth coupled with high inflation.
The last major example is 2000 - 2012, when we had the implosion of the dot-com bubble, the Global Financial Crisis, as well as high inflation (remember the commodities boom, and BRICs?)
Of course, long-term readers know that with stocks, you generate total returns.
Total returns are a function of dividends and capital gains.
The chart above only shows capital appreciation, adjusted for inflation.
I see that chart quite often on the interwebs, as an effort by someone to scare people out of owning stocks. It's easy to try and deceive others, by showing biased data, which shows only half of the picture.
If you show an inflation adjusted total returns chart on S&P 500, you see a much different picture.
The thing is, it is not easy to find a total returns inflation adjusted chart on the S&P 500 since 1871. Which is odd, because the data for it exists.
So, I went ahead and made a chart of the inflation adjusted total returns of S&P 500 since 1871.
Source: Shillerdata.com
You can see that when you adjust for dividends, the chart of total returns is much smoother.
For example, that 1929 peak is not as scary. If you invested in stocks at the very highs in 1929, and you reinvested your dividends, you broke even by 1936/1937. That's just 7-8 years, versus the 25 years you often see quoted around everywhere.
This data and graphs are mostly a reminder to stay invested in diversified portfolios for the long run. One needs to keep costs, taxes, fees, turnover low, and stay invested.
To me, it is a reminder to keep investing for the dividend, and ignore the share prices.
Dividends are much easier to predict, forecast and rely on, because they come from cashflows. They are always positive source of returns, and they tend to grow at or above rate of inflation in the long run. This makes them an ideal source of income for retirees.
In the accumulation phase, this means adding to my portfolio and reinvesting dividends, until dividend income exceeds expenses.
In the retirement phase, this means taking dividends in cash and spending them, leaving anything left over to reinvest.
I do not want to be in a situation where I have to sell stock, because that way I may deplete my portfolio. A negative sequence of return risk at the onset of withdrawals can easily deplete a portfolio that relies of stock sales.
Now historically, a large portion of total returns came from dividends. So those who lived off portfolios (even S&P 500 market index types) didn't actually have to sell stock in most cases. That did change in the 1990s, with the dot-com bubble, and the proliferation of buybacks over dividends.
The real risk today is that you may experience long sideways market without the cushion of dividend payments, given that they are much lower today than in previous decades. We are in uncharted territory.
As we saw in the 1970s and 2000s, buybacks can reduce shares outstanding and lift EPS. However, if the P/E valuation mutliple shrinks, then you are setting money on fire with the buyback. I am giving buybacks the benefit of the doubt here, because I am not even going to mention that many buybacks were initially implemented as a way to offset the dillution from equity compensation to employees. Which should be reducing EPS.
The other real risk today is that in order to generate starting yields above 1%, which is what S&P 500 offers, one needs to create a portfolio that looks different than S&P 500. It is quite possible to build a portfolio that yields say 3% on average today, which would grow dividends at or above rate of inflation over time.
However, you risk that your total returns may end up to be different than S&P 500.
A) Which could turn out to be having better returns in some of the situations, where we may experience a prolonged bear market.
B) However it cold turn out to also be having worse returns in some of the situations, where we may experience a prolonged bull market.
