In performance return analysis for a single year, a stock (or the market) dividend return is easily swamped by capital value changes resulting from either a change in earnings, or change in valuation (earnings multiple). However, over the long-term changes in valuation in the most part revert to the mean, while earnings growth (for the market) approximates nominal GDP growth. That leaves dividends, which reinvested deliver a significant and growing contribution to total return over the long term.
This a simple and compelling way of understanding investment in equities, as explained by Jonathan Crown, Global Equity Portfolio Manager at Threadneedle in a whitepaper which examines the contribution of dividends over the longer term in different markets and also highlights their importance to total return, even in markets such as the US and Japan, where traditionally dividend payments have not been commonplace.
The results show that the UK and Australian markets, where dividend culture is well established, have been the best performing markets since 1970.
Mr. Crown highlights an interesting development in the US, which is changing corporate attitudes to dividends. With margins at highs and pay-out ratios at lows, corporate balance sheets are swollen with cash. Companies such as Apple are embarking on vast share buy-back programs but also initiating and in many cases increasing dividend pay- outs. Investor demand for dividends has grown strongly and companies that are meeting these demands are being rewarded. As a result, managements are increasingly likely to prioritize dividends over other forms of capital returns and Threadneedle continues to expect dividend yields on US stocks to rise over the next few years.