The recent drop in the stock market is an opportunity.
We can get the same assets we were buying before for a cheaper price.
One type of investment in particular will benefit from the recent market weakness…dividend stocks.
My father first told me about dividends long ago.
He said when you find them, stop and pay attention.
As you’ll see below, the numbers bear his words out.
And with the recent market weakness, dividend investments now offer greater upside than they did just a few weeks ago.
Dividend Stocks: A Powerful Investment
From 1930 to 2017, the payouts from dividend investments made up 42% of the total return of the S&P 500 Index.
The investment firm Hartford Funds presented this chart in one of its recent white papers:
(Source: Hartford Funds: The Power of Dividends. Past, Present, and Future)
And while these percentages are helpful, I would like to quantify this a bit more.
The data in the above graphic is from investment research firm Morningstar.
It learned that from 1960 to 2017, reinvested dividends accounted for 82% of the total return of the S&P 500. (Dividend reinvestment is when you use the dividends you receive to buy more shares.)
Take a look:
(Source: Hartford Funds: The Power of Dividends. Past, Present, and Future)
What Does That Mean for Me?
This means it makes sense to consider firms with a solid dividend history.
Especially today!
The reason for this is because prices have fallen. So today you can generate a greater dividend yield than you could just a few weeks ago. (Dividend yield equals dividends paid divided by share price.)
At the end of 2017, the dividend yield on the S&P 500 was 1.89%.
By the end of 2018, it was nearly 14% higher, at 2.15%.
This may sound like a minimal difference. But it can be meaningful over a long time period.
For example, over 20 years that 0.26% difference (2.15% less 1.89%) will generate almost $800 extra for you. (That’s based on a $10,000 investment.)
And if we assume the stock price moves 5% higher each year over that period, you will have nearly $1,900 more at the end if you reinvest the dividends.
Also, dividend stocks can serve as insurance. By that, I mean if the market drops, dividends will cushion the fall.
In the decade of the 2000s, stocks fell almost 1% per year on average. However, investors earned 1.8% from dividends. The drop would have been closer to 3% without them.
A Great Way to Exploit This
It’s logical to think the best stocks to own are the ones that grow their dividends the fastest.
One exchange-traded fund (ETF) has proven this.
Bloomberg shows the iShares Core Dividend Growth ETF (NYSE: DGRO) has been public since June 2014.
From its inception to January 4 of this year, its total return is almost 6% better than the S&P 500.
I told you above that the dividend yield of the S&P 500 increased to 2.15% over the past year.
The fund yields 2.4% … or 11.6% more than the index. And its low 0.08% expense ratio won’t eat up too much of that.
Good investing,
Brian Christopher
Editor, Insider Profit Trader