Investing

The Only Thing That Gives Me Pleasure

By Charles Sizemore  |  April 1, 2019

John D. Rockefeller was the richest American in history — and probably the richest man who ever lived. Adjusted for inflation, his net worth around the time that he died in the 1930s was estimated at an unbelievable $253 billion to $367 billion in today’s dollars.

To find somebody richer than Rockefeller, you’d have to go back to a time when wealth was measured in gold.

King Solomon’s net worth was estimated at $2.2 trillion, and Crassus, a contemporary of Julius Caesar, was said to have carried a net worth as large as the entire annual budget of the Roman Empire.

At any rate, in addition to being extraordinarily wealthy, Rockefeller was also highly quotable. One of my favorite quotes of his related to dividends:

Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.  

The quote may very well be apocryphal. Rockefeller allegedly made it as an offhand comment to a neighbor; to paraphrase Yogi Berra, he probably didn’t say everything he said. But if true, Rockefeller must have been the happiest man alive.

Rockefeller founded Standard Oil and at one point controlled 90% of the U.S.’s oil refining business. Standard eventually got broken up, but its successors are two of the largest companies in the world: ExxonMobil and Chevron.

And Rockefeller insisted that two-thirds of the profits of this behemoth be paid out in dividends.

Let’s just say those must have been some large checks hitting his mailbox.

But the thing is, dividends are about more than just income. Paying a dividend creates a fundamentally better kind of company. Earnings per share can be massaged, and revenues can be manipulated. But you have to have cash on hand to pay dividends. You can’t make it materialize with dodgy accounting.

Paying a dividend forces management to be disciplined. In declaring that dividend, they are implicitly saying that it is your money and not their personal piggy bank to spend on pet projects that inflate managerial ego but add no real value.

This isn’t idle conjecture. Dividend-paying stocks have significantly outperformed their non-paying peers over time.

To find out more, click here to gain access to my Peak Income portfolio. As I write, 14 of our 15 holdings are in positive territory and paying out an average of close to 7% in dividends.

Let’s look at the numbers.

Returns By Dividend Policy (January 31, 1972 to January 31, 2018)

Dividend PolicyAvg. Annual Total Return
Dividend Cutters-0.3%
Non-Dividend-Paying Stocks2.9%

Dividend Payers With No Change

7.5%
All Dividend-Paying Stocks9.3%
Dividend Growers and Initiators10.1%

 

Research firm Ned Davis Research crunched the numbers for all S&P 500 stocks over the 46 years starting in 1972 and found that dividend stocks outperform across the board.

All dividend-paying stocks as a group returned a respectable 9.30% per year, and stocks that initiated or grew their dividends did even better, returning 10.1%.

The companies that don’t pay a dividend didn’t fare so well, returning only 2.9% per year. And companies cutting their dividends actually lost money.

This is not a minor rounding error. The dividend payers out-returned the payers by 6.4 per year… compounded!

Now, stop and think for a moment that these numbers include conspicuous non-payers like Facebook (Nasdaq: FB), Amazon.com (Nasdaq: AMZN), and Alphabet (Google) (Nasdaq: GOOGL).

While these companies have obviously trounced everything else, they are the exceptions and not the rule. For every non-payer like Facebook that succeeds, there are legions that just sort of muddle along. The data proves that dividend paying stocks absolutely crush their non-paying peers over time.

This is particularly important today, as we’re 10 years into a bull market that, frankly, probably doesn’t have much longer to run. If stocks move sideways for the next few years or, worse, have a real crash, cash dividends might be the only return you get from your stock portfolio over the next several years.

This is why I publish Peak Income every month. I want my readers to earn enough in regular dividend income to allow them to live comfortably without having to depend on capital gains.

Of course, I like capital gains too… and I expect every recommendation to generate a handsome total return of both income and capital appreciation.

I just don’t like depending on something I can’t control, particularly something as fickle as the market.

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR