Day 2: The Dividend Key - Real Return Comes from Dividends

Written by The Dividend Guy on January 1, 2008

The Dividend Key

In yesterday’s post on The Dividend Key, the importance and value of reinvested dividends was presented. Today, I am going to present the findings of a study by Robert D. Arnott that broke down investment returns into their individual components. The study looked at three sources of returns for investors:

1. Inflation - the amount a stock grows just through inflationary trends
2. Valuation expansion - the company becomes more valuable and therefore so does the stock price
3. Dividends - the yield received when a stock is purchased
4. Real Dividend Growth - the increase in dividends a company may provide year after year

The study pulled a crazy amount of data going back to 1802 and found that the total annualized return for this period (1802 - 2002) was 7.9%. The interesting part was what made up this return. The graphic below highlights the findings and shows that a total of 5.8% of that return comes from dividends (5% from dividends + 0.8% from real dividend growth):

Investment ReturnsClick to Enlarge

Put another way, 73% of the growth in U.S. equities going back 200 years have come from dividends. That is in the form of pure dividends and AND a company raising its dividends. This is very powerful stuff we are dealing with here.

Source: Tweedy Browne Company LLC (link opens a .pdf document)

(Photo Credit: daniel wildman)


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2 Comments so far

  1. Dividends4Life January 1, 2008 10:10 am

    That is some impressive information. Thanks for sharing it!

    Best Wishes,
    D4L

  2. Dividends RULE January 7, 2008 12:47 am

    Dividend Guy- I think your next analysis should be TD Bank and Scotiabank. Would be interested to see those ones. Thanks.

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