Editor’s Note: Today, we’re sharing an insight from colleague and income investing specialist Brad Thomas. As Brad says, the age of “free money madness” is over. Investors need to get back to basics to thrive in the years ahead. Read on…
It feels like the whole world went topsy-turvy over the last few years.
2020 brought a worldwide pandemic.
And then in 2021, all investment fundamentals were thrown out the window.
Down was up. Risk was good. And safety was lame.
This resulted in insane assessments and actions, such as:
Hertz Global Holdings (HTZ) shooting up by 800%… the day it filed for bankruptcy.
Electric vehicle maker Rivian Automotive (RIVN) peaking at a market cap of $150 billion… with zero sales at the time.
A digital picture of a rock selling for $1.3 million.
You read that right. A rock!
I guess that’s what happens when you have $5 trillion in government stimulus and record-low interest rates pouring into a shutdown economy.
One of the most epic speculative bubbles in U.S. history is pretty much inevitable at that point.
That free-money madness made it easy to forget that stocks represent real companies. But the truth came crashing in on us nonetheless in 2022.
And it’s becoming obvious again in 2023 that the stock market’s real value comes from slow-but-steady wealth creation.
At Intelligent Income Daily, my team and I know that firsthand. Our decades of market experience and research prove that dividend stocks have a great track record of making investors rich…
Slowly but surely. And regardless of these wild market drops so many have been suffering from.
I’ve explained this repeatedly in past issues. But not quite like this.
Today, let me show you two specific reasons you should be a dividend growth investor – if you’re serious about maintaining wealth, that is.
Dividends Turbocharge Stock Returns and Reduce Risk
Most people know the U.S. stock market is a great way to build wealth over time. Adjusted for inflation, it’s delivered about 7% annual returns.
But dividends play an important role in boosting those long-term stock returns – above and beyond share price appreciation.
According to research from the IESE Business School, from 1900 to 2018, the S&P 500 delivered 416x price returns, or 14x after inflation.
Whereas taking dividend payments and reinvesting them into the originating companies that paid them? That resulted in 49,990x returns, or 1,656x after inflation.
I don’t know about you, but I find those to be very compelling numbers.
None of us were alive to invest in stocks back in 1900, of course. But the same power potential exists today.
Moreover, it even exists in the face of inflation. That financial thief becomes far less of an issue with dividends – which have historically grown 1.6%–3.5% faster.
That’s reason No. 1 why dividends are so great: They supercharge stock returns. And here’s reason No. 2…
They greatly reduce risk.
According to JPMorgan Asset Management, from 1980 to 2020, 44% of all U.S. stocks suffered 70% declines – or worse – and never recovered.
But let’s use British American Tobacco (BTI) as an example of how dividends can protect you from that statistic.
It’s a “boring” blue-chip company that’s been around for over 100 years. And it pays a steadily growing dividend.
We ran it through our back-testing system, which measures data back to 1986. So we’ll use that as our starting point in imagining you’d bought $1,000 worth of its stock.
If you’d chosen not to reinvest your dividend payouts, that inflation-adjusted investment would be worth $7,248 today – better than the S&P 500’s $6,669 result.
But with dividend reinvestment? You’d be sitting on $42,332!
That’s the power of long-term dividend growth investing.
The Best Companies Are Often Dividend Stocks
I know the notion that dividends are for retirees and pension funds. And I fully understand the allure of intense immediate gains – something dividend stocks rarely do.
But the best time to start looking seriously at safe, dividend-paying stocks is now.
By shifting your view away from the topsy-turvy world we’ve been plunged into and focusing on fundamentals, you can set yourself up for incredible returns over time.
In reality, some of the best companies in history are dividend stocks. And one name that sticks out in particular is Altria (MO).
It has provided almost 200,000x inflation-adjusted returns over 90 years. That easily makes it the best-performing stock in history.
That’s much more reliable than Hertz Global’s 800% and Rivian’s ridiculous rise… or any one-off rock sale, some of which have plummeted in value since and go for around $230,000 today.
In fact, had you bought on its IPO day (November 10, 2021) you would be down 88%, while MO is up 17% as of today.
The free-money madness I mentioned before can never go the distance. But put the right dividend-paying stocks in your portfolio, and you’re bound to come out ahead almost every single time.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily