Are You Still Chasing Dividends?
From 1940 up till 1979, U.S. stocks (S&P500) gave a total return of 10.43% p.a., of which, slightly more than 50%¹ was made up of dividends.
However, things started to change in the 1980s. Companies increasingly chose a different way to return cash to shareholders; it came in the form of share buybacks. From 1980 to 2019, dividends contributed only about 16%¹ of the total return in the S&P 500, a stark difference from four decades earlier.
Research from NYU Professor of Finance, Aswath Damodaran, shows that the preferred method of corporations to return cash to shareholders is clearly trending more and more towards buybacks instead of dividends. By 1988, share buybacks accounted for about a third of all cash returned to shareholders. In 1998, share buybacks exceeded dividends for the first time in US corporate history. Today, almost two-thirds of all cash returned to shareholders come in the form of share buybacks.
While the U.S. is the leader in share buybacks, companies in the UK, Canada, Japan, and Europe are also leaning towards buybacks, returning a third or more of cash in the form of buybacks as opposed to dividends.
If you are still focused on dividends, you might be missing the forest for the trees. As corporate behaviour changes, investors have to adapt to capture returns. Warren Buffet’s compounding machine, Berkshire Hathaway, has never paid any dividend to shareholders since he took control of the company in 1965, and yet has compounded money for its investors at 19.8% per year (1965 to 2022). The age old discipline of buying good companies that are growing earnings and profit margins at fair prices still hold.
Dividends are important, but they should not be the focus of your investment decisions. We have written previously on whether investing in dividend stocks is a good strategy here and here.
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¹Analysis from Hartford Funds 02/2020