Why the Return from Dividends Matters

Yesterday, I posted what I called a very “underrated chart” to Twitter. This is the S&P 500 Total Return Index divided by the S&P 500.

Some of the responders on Twitter weren’t terribly impressed. To generalize, they said, “so what, it’s just a 2% dividend yield. Big deal.”

But in my view, it’s a very impressive chart and it shows us the importance of dividends.

Allow me to explain. First, note how stable the line is and how it rises consistently. As an investor, that’s nice to see.

Technically, the chart shows us the return from dividends for investing in the S&P 500 since the beginning of 1990. It’s not just the dividend yield. It’s the return from dividends. That means it’s the dividend yield plus it accounts for the growth of dividends. That’s a key factor.

Think of it this way. Imagine a stock with a 1% dividend yield. For the next several years, the stock and the dividend both grow by 15%. What’s the result? The dividend yield will stay at 1% but you actually make a ton of money from those dividends.

There’s also the multiplier effect. Over the last 30 years, the return from dividends has been 91.58%. Getting dividends from the S&P 500 hasn’t added 91% to your total return.

Not even close.

Instead, it turns an 835% gain into a 1,693% gain. It adds hundreds of percentage points to your totals — and that extra amount balloons higher each year. Dividends are small and easy to overlook, but they make a big difference.

For another picture, here’s a look of the S&P 500 (blue) along with the S&P 500 Total Return Index (red). So the first chart is the red line divided by the blue line.

Posted by on September 23rd, 2020 at 11:01 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.