The US national debt (or) gross federal debt of the US has exceeded $32.0 Trillion according to an article at Peter G.Peterson Foundation. For a normal person this figure seems so huge and is difficult to comprehend with so many zeros. The below infographic puts this mountain of a debt into perspective:
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Source: THE NATIONAL DEBT IS NOW MORE THAN $32 TRILLION. WHAT DOES THAT MEAN?, Peter G.Peterson Foundation
Dividends account for a substantial portion of the long-term total returns. This is especially true in countries or regions where the dividend culture exists. For instance, the S&P 500 dividend yield is currently just 1.55%. Most European countries on the other hand have dividend yields of 3% or more. The FTSE 100 for example has a dividend yield of 3.69%. Higher dividend yields means larger total returns when many years or even decades are considered due to the effect of compounding.
According to a research report by Yoichiro Kai at T.Rowe Price, dividends accounted for 46% of the total returns in Europe from 1999 to Jan, 2023 as shown in the chart below:
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Past performance is not a reliable indicator of future performance.
As of January 27, 2023.
Source: T. Rowe Price analysis using data from Bloomberg Finance L.P. (see Additional Disclosures).
Source: Tapping the Power of Global Equity Dividends, T.Rowe Price
The key takeaway is that dividends are important and investors should not focus on just growth-oriented stocks for price appreciation to earn higher long-term total returns.
Over the long term dividends constitute a significant portion of the total returns of any dividend paying stock or investment. Due to the effects of compounding returns tend to multiple many times over the years even if the start point of the dividend yield is low. For instance, the current dividend yield on the S&P 500 is 1.62%. However over many years or decades the total return of the S&P 500 index would be higher than the price returns as reinvested dividends grow many times over.
Another way to earn higher total returns is by investing in companies that increase dividends consistently over time. This strategy easily beat the total returns on the S&P 500 index. According to an article by Yoichiro Kai at T.RowePrice the difference in returns between firms that increased dividends and the S&P 500 is substantial.
From the piece:
That importance is even clearer with sustained dividend growth. As an example, the S&P 500 Dividend Aristocrats Index, which represents over 60 S&P 500 companies with 25 consecutive years of dividend increases, has outperformed the S&P 500 Index by more than 75% since 1989 (Figure 4). By identifying companies with the ability to sustain and grow dividends and taking an active, global approach, we believe we have the potential to drive consistent long‑term returns.
(Fig. 4) Indexed total returns for S&P 500 Dividend Aristocrats Index and S&P 500 Index:
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Source: Tapping the Power of Global Equity Dividends by Yoichiro Kai at T.RowePrice
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Disclosure: No positions