That was the message delivered by Goldman Sachs chief equity strategist David Kostin last week when he forecast ZERO price gains for the S&P 500 Index over the next 12 months, but this doesn’t mean stock investors can’t make any money.
He also estimates that stock prices may gain less than 3% per year on average over the next decade.
The good news, dividends will help stock investors boost their overall return to 5% annually over the next 10 years, with almost half of the total return coming from the dividend yield alone.
Adjusting your stock return expectations was the topic of my Money and Markets article a couple of weeks ago. I pointed out that according to similar valuation research from the investment firm GMO, U.S. large-cap stocks could deliver negative real returns (-2%) over the next seven years. In other words, investors will need to count on the return of inflation just to break even.
This math highlights the often overlooked but very important role growing dividends play for investors.
|Stock gains might not be as big as in past years, leaving many investors to rely on dividends to bolster their portfolios.|
Historically, dividends have been a key component of your overall return from owning stocks. That’s especially true if you are willing to forgo the immediate income and reinvest dividends. Since 1930, 42% of the total return from stocks was produced by dividend income, but dividends fell out of favor in the 1980s and 1990s as stock prices surged.
During the 10 years ending in 1999 for instance, dividends accounted for only 11% of the S&P 500 total return. But in today’s ultra-low interest rate world, dividends are making a comeback. Since 2000, dividend income has accounted for nearly 46% of the S&P 500 total return.
Over that period, stocks in the blue-chip index returned 5.2% a year with dividends reinvested. Without dividends, your annual gains would have been reduced to just 3.2%!
Investing with an eye toward dividends can help mitigate some of the sharp up and down swings in stock markets. Dividend paying stocks are typically larger, more stable companies, especially those with a long history of growing dividends.
If dividend income appeals to you as a stock investor, there are several ETFs that focus on dividend paying companies. One of my personal favorites is the PowerShares Dividend Achievers ETF (PFM) with a yield of 2.3%, comfortably ahead of the S&P 500 Index, which yields 1.8%.
As I pointed out in last week’s Money and Markets column, international stock markets have quite a valuation advantage on U.S. stocks today. And as you might expect, many developed markets offer dividend yields that are far above the S&P 500 yield of 1.8%.
European stocks yield 3.4%, and stocks in Hong Kong and Taiwan yield about 3%. And shares in both Australia and New Zealand offer dividend yields of more than 4% right now.
Finally, if you like the idea of targeting dividend-rich stocks in faster growing emerging markets, consider the WisdomTree Emerging Markets Equity Income ETF (DEM) with a yield of 4.4%!
Bottom line: Dividends pay you steady income quarter after quarter while you’re waiting for your stocks to appreciate in price. In today’s turbulent markets, don’t underestimate the key role dividends play in boosting your overall return.