Jeremy Siegel talks about the virtues of owning dividend-paying stocks in a bear market. Those dividends (if reinvested) buy more and more stock as a company’s stock price declines. When the stock price rebounds, those extra shares-from-dividends act as “return accelerators,” leaving you in a much better position than where you started, even if the ending stock price is the same as it was before the bear market.
On Sept. 3, 1929, the Dow Jones Industrial Average hit 381—and it did not reach that level again until November 1954… [T]he average stockholder who reinvested his or her dividends actually showed a positive return of more than 6% per year during that 25-year period, easily beating the performance of bonds and short-term treasuries…
It’s quite a case for evaluating your portfolio and looking for dividend-paying stocks, if you believe we’re in store for a bear market someday. By the way, the article also stipulates that dividend-paying stocks are good in bull markets as well.
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5:12 pm (reply)
My financial planner had similar advice for me as well. So, although I own a couple of growth stocks, the bulk of my portfolio is invested in safe but boring companies that pay regular dividends.
1:35 am (reply)
Good info, but dividends are good regardless of the market cycle. Great post, I like the historical info.
2:21 pm (reply)
I have written favorably about Prof. Siegel in the past. But, I think investing in dividend-paying stocks should come with a qualification. If the choice during the post-1929 boom was between dividend-paying equities and non-equities, then clearly dividend-paying equities is the better choice. But, was it the only and/or best choice for that time period? It wasn’t the only choice as alternative investment vehicles included real estate and U.S. Treasury bonds, for example. So, was it then the best investment vehicle for the time period? Not compared to long term U.S. Treasury bonds, which increased in price during 1930s ironically as investors placed an emphasis on return of investment. over return on investment.
It would be convenient if there was a single investment vehicle that we could all mindlessly dump money into every year. But, I would suggest to you that there is nary a single investment vehicle that most of us can use over the long term because most of us will need to tap our investments within a time period shorter than the long term envisioned by academics. Unfortunately, that means that asset classes must be weighed against each other and weighed in view of the macroeconomic environment.
In The Future for Investors, Prof. Siegel may very well have recognized this, and hence mentioned approvingly of Michael O’Higgins Beating the Dow with Bonds, and suggests his own modifications, including one he calls the Core 10.
10:27 pm (reply)
I can’t believe this even a debate. Dividents are way, way better. Hands down.
6:01 pm (reply)
Why all the quivocating about dividends? Dividents are the single best indicator of a companies profitability. Theres no question about it, all things being equal divvy paying stocks are WAY better than non dividend paying stocks.
Best,
James
12:58 am (reply)
The single greatest factor determing overall dividend return is the price you pay for the income paying security.
Pay too high a price, and you’ll be dead before your yield breaks 20%. S&P average dividend yield at the bottom of a bear market (let’s say 1982) was almost 6%. Appreciation from 1982 until 2000 was 1200% or 12x.
Even though yields had dropped to 1% in 2000, the average 1982 investor was still seeing a 12% yield on his money every year he held it.
Although you may think that dividend stocks are a no brainer, if you buy them at the wrong time you may not live long enough to see those 12% yields.