Decades ago, one of my colleagues made a presentation at a financial conference on the importance of dividends. As he left the podium, he was confronted by a college professor who declared, “I just don’t believe in dividends.”
But dividends are real, they don’t require faith — they simply “are.” Rather than approach the topic in an analytical fashion, the professor seemed to react to investing as though it were a religion. Which is precisely the opposite of what we seek to do.
Investing successfully requires a kind of agnostic thought process. We must be indifferent to emotion and volatility. Undogmatic, dispassionate, concerned only with the facts.
The question is not whether we believe in dividends, the question is what they tell us. Blind bias adds little to total return. We must contend with the world and stock market we are given. It is there we will find value. It is there we collect dividends, whether we believe in them or not.
Don Kilbride, the manager of the Vanguard Dividend Growth fund, remarked toBarron’s in November of 2013, “Ninety percent of what we do is opinion — value, quality, estimates. But two (factors) are not debatable: Price and dividend. I focus as much as I can on fact.”
I have written in the past of the importance of dividends as a stock selection input, but they also contribute significantly to total return. Last year, the price return of the S&P 500 was a negative 0.7 percent, but when the dividend return was added in, the total return for the S&P was 1.4 percent. Over time, the contribution of dividends to total return compounds significantly.
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For 25 years, I commuted into San Francisco to work. During the Internet bubble at the end of the end of the 1990s, the traffic grew to epic proportions.
A normally 30-minute drive morphed into an hour, sometimes an hour and a half. Too many cars, too few lanes. The traffic made me crazy, and I drove like it. I was the driver who merged first into one lane and then another to anticipate the flow. Inevitably, once I switched lanes, the traffic slowed and the cars in my previous lane whooshed past. If I shifted back over, the traffic in front of me once again suddenly slowed and I watched another stream of cars whiz by on either side. By trying to anticipate future traffic flows, I inevitably came up short and increasingly frustrated.
On the heels of the worst short-term opening for stocks (ever!), it is important to have a plan, know your risk tolerance and to implement your discipline with conviction. One day I observed that changing lanes didn’t pay. The best strategy was to pick a particular lane and stick to it. I learned not to zig. Or zag. I resisted the lure of chasing the apparent traffic flow, because from my vantage — in the thick of the traffic jam — I lacked perspective so I stuck with my driving discipline and didn’t veer from the plan.
According to Deutsche Bank, the stock market, on average, has a correction every 357 days, or about once a year…
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