Investment returns and why dividends matter (and they matter a lot)
On January 22, 2018 the S&P 500 Index closed with a price of 2872.87.
On April 1, 2019 the S&P 500 Index closed with a price of 2866.29.
In other words, over nearly 15 months the S&P 500 Index lost 6.58 points, or -0.23%. All the headlines. The noise. The up days and down days. All for -0.23%.
On price alone, “stocks” made no money. If you invested $100,000 in the Index on January 22, 2018, on April 1, 2019 your balance would show $99,771.
Or would it?
The dividend difference
While the price of a stock or index is what’s most obvious because we see it fluctuate day-by-day, the S&P 500 Index (and many other stocks) have another investment return component. Dividends! Your investment return is made up of the price change PLUS dividends. The average investor forgets about dividends and focuses on price alone. However, this would be a mistake.
What if we included a 2% dividend payment, paid quarterly, from January 22, 2018 through April 1, 2019?
We know that the price of the S&P 500 Index was negative during this time period. But what if you had re-invested your quarterly dividends? I’ll spare you the *math and cut to the chase!
Your April 1, 2019 balance would be $102,265. This is $2,494 more than the price return shown above, or 2.49% higher!
Yes, I’m cherry-picking dates for purposes of the example. Yes, this is a short amount of time relative to an investor’s lifetime. However, my point with the example is to remind you that dividends matter, and they matter a lot. Specifically, re-investing your dividends matters a lot over the course of your investor lifetime. Check out this article if you’re curious to learn more about dividends and their importance.
What about you?
Are your investment accounts re-investing your dividend payments? You can check your investment accounts to confirm they are enrolled in what’s called DRIPs, or Dividend Re-Investment Programs. If not, you may want to consider using the DRIP feature.
Of course, this example assumes that you didn’t sell or tweak your investment allocation along the way. It also doesn’t include diligently making contributions to your account throughout the year. Both of these behaviors also have huge implications for your investment returns.
So while price is important, what’s more important to your financial success is your personal discipline and diligence in sticking to a plan. Focus on what matters. Focus on what you can control.
– Kaleb Paddock, CFP®
You can learn more about Ten Talents and Kaleb, a financial planner based in Parker, CO, here.
*I’m happy to share the math behind dividend re-investments in this example. Just shoot me an email and let me know you’re interested.
Planning ahead for retirement?
Get the 7 Essentials for Successful Investing in Retirement.