What’s interesting to me is the reality that almost half of the total return of the S&P 500 over past decades has come from dividend yield, and few investors today seem to want to focus on this fact.
I’m going to talk about why yield is important, and why investors ought to consider beefing up the average yield in their portfolio to maximize returns.
A variety of different methods can be used to put a valuation on a company. While today the model of choice has to be the discounted cash flow model, an older and less widely used methodology was the dividend payback model, which essentially estimated the number of years it would take to get an investment back in a company using dividends alone.
The reality that so many companies today prefer share buybacks over paying out dividends has resulted in such a methodology being deemed mostly useless. I, however, still think this is a valuable methodology.
Yes, dividends are taxable. This is most certainly the reason many “dislike” dividends. But if I have to consider money in my pocket today (taxed or not) versus money down the road (which will still be taxed by the way, just at the lower capital gains rate), I’d choose to have my money today, to reinvest.
Higher-yielding income stocks also provide a nice income stream in retirement, in the same way as an investment property would (great cash flow plus capital appreciation upside), so what’s not to like?
Invest wisely, my friends.
