Dividends are often thought of as merely a nice sweetener to the investment return expected to be garnered from a stock’s price appreciation. Dividend-paying stocks have gone in and out of favor over the last five decades, losing their appeal in periods of strong economic growth, but considered a safer investment in times of uncertainty.
According to recent research, it turns out that dividends have played a major part in investment performance over time. Total return from an investment includes the price appreciation of the investment and the income it generates. A study provided by International Strategy and Investment explains that 53.8 percent of the stock market’s total return since 1930 is attributed to dividends alone.
According to a study by Ned Davis Research Inc., dividend payers have outperformed nonpayers in four out of the last five decades, with the only exception being the 1990s. Dividend-paying companies also have outperformed nondividend-paying
stocks with considerably less volatility in the period between December 1973 and March 2011.
Dividend growers and initiators had an annualized total return of 9.6 percent and a standard deviation of 17.2, while the nondividend-paying stocks returned 1.7 percent and a standard deviation of 25.9. Standard deviation is a measure of risk, so the higher the number, the more volatile the price.