- 3 Big Scoops
- Posts
- đź—ž Dividend Investing: 101
In partnership with
Bulls, Bitcoin, & Beyond
Market Moves Yesterday
S&P 500 @ 5,881.63 ( ⬇️ 0.43%)
Nasdaq Composite @ 19,310.79 ( ⬇️ 0.90%)
Bitcoin @ 95,525.81 ( ⬇️ 1.08%)
Hey Scoopers,
Happy New Year! Are you ready to invest in 2025? So, let’s begin with a boring but highly effective investing strategy.
Imagine turning $10,000 into more than $5 million. Now imagine doing it without picking the next Amazon or betting on cryptocurrency moonshots.
Investors achieved this by using one of the market's most overlooked strategies: dividend investing, which has built massive wealth for patient investors.
They're like the Volvos of the investing world - not flashy at first glance, but incredibly powerful under the hood.
Today, we'll reveal why some of the world's most intelligent investors are investing billions in dividend strategies and why this "boring" approach might be the key to reaching their financial goals.
Effective, Accessible Alcohol Addiction Treatment: Now Scaling Nationally
Expert-guided mental health and addiction treatment therapies
Hundreds of patients treated at home using medication & therapy
Your $350 investment helps reach millions more
The Long-Term Impact Is Bigger Than You Think
Here's a number that might surprise you:
85% of the S&P 500's total return since 1960 came from reinvested dividends and compounding.
To put that in perspective, if you invested $10,000 in 1960:
With dividends reinvested: It grew to $5,118,735
Without dividends: It only reached $796,432
This isn't just ancient history—dividends are crucial to total returns, especially during challenging market periods.
Not All Dividend Stocks Are Created Equal
Most investors make a crucial mistake: chasing the highest dividend yields. Research shows that companies offering the highest yields often underperform those paying more moderate, sustainable dividends.
Why? The answer lies in the payout ratio - the percentage of earnings used to pay dividends:
First quintile (highest-yielding) stocks: 75% average payout ratio
Second quintile stocks: 41% average payout ratio
A high payout ratio often signals unsustainable dividends. When companies are forced to cut dividends, their stock prices decline significantly.
The Best Dividend Strategy: Focus on Growth
The most successful dividend strategy isn't about finding the highest current yield but finding companies that consistently grow their dividends.
From 1973 to 2023:
Dividend growers and initiators: 10.19% average annual return
Dividend payers (no growth): 9.17%
No change in dividend policy: 6.74%
Dividend cutters and eliminators: -0.63%
Non-dividend payers: 4.27%
What’s even more impressive? Dividend growers achieved these superior returns with significantly less volatility than other stocks.
Three Major Trends Supporting Dividend Stocks
Record Corporate Cash Levels: Since the early 2000s, companies have nearly quadrupled their cash holdings. A massive cash pile makes it easier for them to maintain and grow their dividends, even during economic downturns.
Attractive Yields in a Low-Rate World: While interest rates have risen recently, they remain low by historical standards. As of December 2023, 18% of S&P 500 stocks have dividend yields higher than 10-year Treasury bonds, making them attractive for income-seeking investors.
Demographic Tailwinds: Baby boomers entering retirement are increasingly seeking reliable income sources. This demographic shift and institutional investors' growing interest in dividend strategies could provide ongoing support for dividend-paying stocks.
The Smart Way to Invest in Dividends
Based on the research, here are the key factors to consider:
Sustainability Over Size
Look for companies with payout ratios below 75%
Focus on consistent dividend growth rather than the highest current yield
Consider the company's cash flow and earnings stability
Quality Matters
Companies that consistently grow dividends tend to have strong fundamentals
Look for businesses with solid competitive positions and healthy balance sheets
Avoid companies stretching to maintain unsustainable payouts
Think Long Term
Dividend investing works best with a multi-year holding period
Reinvest dividends to harness the power of compounding
Stay diversified across sectors and industries
The Current Opportunity
The timing for dividend investing looks particularly attractive now. Corporate profits are near record highs, while average payout ratios are well below historical norms.
The S&P 500's current payout ratio is just 36.5%, compared to a 97-year average of 56.1%, suggesting significant room for dividend growth.
The Final Scoop
While dividend investing might not generate exciting headlines, the historical evidence is clear: companies that consistently pay and grow their dividends have provided superior long-term returns with less volatility.
Remember: Past performance doesn't guarantee future results, and dividends can be cut or eliminated.
But dividend-growing stocks offer a compelling combination of income, growth potential, and relative stability for investors seeking a time-tested strategy for building wealth.
DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell assets or make financial decisions. Please be careful and do your own research.