Not Exactly, but a Promising-Looking Future for Dividend Stocks.
A technology revolution is changing the world forever. Ring a bell? It should. We’ve heard it plenty over the course of the last 12 months. But that isn’t the only time it’s been trendy. The catch phrase was just as popular back in 1999 as it is in 2021. Those who were following the markets in the late 1990’s may remember a time when people were quitting their jobs en masse to become day-traders. That was a particular technology revolution which would change investing forever.
The growing popularity of cable business news and online trading allowed the “little guy” to compete with the establishment. Old school investors just couldn’t comprehend that profits and cash flow didn’t matter anymore – eyeballs and clicks were the new market driving metrics. A common narrative espoused that with “hockey-stick” shaped growth forecasts, these companies would eventually make money and you would be happy that you owned them.
Sound familiar? All too often, comparisons between the late 90’s and today focus on the handful of large cap technology stocks with profitable and growing businesses – claiming “this time is different”. To us, it’s more relevant to look at the similarities rather than focusing on the differences.
We now have YouTube, Reddit and Robinhood giving the “little guy” the confidence to take on Wall Street. Memes and rocket ships have taken the place of eyeballs and clicks. Once again hockey-stick shaped growth forecasts seem to justify paying any price for companies that MAY disrupt the status quo.
For many, the stock market looks a lot like a casino. It’s hard to take your eyes off the constant stimulation of flashing lights and instant satisfaction of booking profits (or losses) in your online brokerage account. Casinos can be fun, but it’s common knowledge that the house always wins.
Many newly minted day-traders learned this the hard way when they cashed in their chips in 2000 after seeing the S&P 500 decline nearly 40% from Q1 2000 through Q4 2002, and tech stocks declining more than 70% over the same period. Meanwhile, dividend-paying stocks significantly outperformed, with above-average dividend payers returning 29% from Q1 2000 to Q4 2002.
Source: Bloomberg, as of 12/31/2020. Index performance shown is for the S&P 500 Index and Nasdaq Composite and does not represent TrueShares fund performance. Performance is cumulative. Above Avg Dividend Payers includes all S&P 500 stocks with a trailing 12 month dividend yield greater than the average S&P 500 dividend yield, rebalanced quarterly. It is not possible to invest directly in an index. Performance data quoted above represents past performance and does not guarantee future results.
While dividend paying stocks may be boring in comparison to memes or rocket ships, the performance of dividend paying stocks has been anything but boring. Over the last 25 years, $10,000 invested in Above Average Dividend Payers would be worth $204,574 vs. $97,811 and $153,022 for the S&P 500 and Nasdaq, respectively.
Growth of $10,000 Above Average Dividend Payers, S&P 500 Index and Nasdaq Composite Index
12/31/1995 – 12/31/2020
Source: Bloomberg, as of 12/31/2020. Index performance shown is for the S&P 500 Index and Nasdaq Composite, and does not represent TrueShares fund performance. Performance is cumulative and based on quarterly returns. Above Avg Dividend Payers includes all S&P 500 stocks with a trailing 12 month dividend yield greater than the average S&P 500 dividend yield, rebalanced quarterly. Performance data quoted above represents past performance and does not guarantee future results.
As a result, at TrueShares, we believe there is a place for active management in dividend investing. By focusing on owning companies with both a willingness and ability to grow their dividend, we strive to put together a portfolio that offers an attractive yield today, a growing stream of income, and less volatility over time. Three features, we feel almost all investors can appreciate.
Regardless of what’s happening with your favorite rocket ship stocks, it may be a good time to make dividend-paying equities a core part of your overall portfolio—they may provide you a smoother equity ride.
*Securities that pay high dividends may fall out of favor with the market, causing these companies to underperform companies that do not pay high dividends. Further, companies that have historically paid a dividend may reduce or discontinue the payment of dividends.