It’s true, and it’s science. When it comes to investing, dividend stocks have been shown to grow more year after year after year. That’s compared to the average of the S&P 500, and not just over the last 20 years — not even the last 50. No, between 1930 and 2022, a study by Hartford Funds found that dividend income contributed 41% of total return to the S&P 500 Index.
So, let’s get into what’s going on here and how investors can take advantage in the long term.
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Some history
The study, as mentioned, looks at the period between 1930 and 2022. During this time, it found that dividends played a larger role in contributing to total returns during the 1940s, 1960s, and 1970s. These were decades where total returns were below 10%. This also saw dividends see lower returns during the 1950s, 1980s, and 1990s, when returns hit double digits.
The 1990s, it found, were when dividends were de-emphasized. Instead, companies focused on reinvesting in the business. So, 2000 to 2009 was referred to as the “lost decade,” where the S&P 500 Index produced a negative return.
The study then found that during these past decades, there were five groupings of dividend stocks that increased their dividends. The first increased by the most each year, and the fifth the lowest amount each year. What they found was that the second highest beat the S&P 500 Index eight times out of the 10 decades. Further, the first and third levels tied for second, with those increasing their dividend by the lowest, also saw these stocks lag behind the S&P 500.
What this means
What investors can take away from this is that dividend stocks that fall within the top 60% to 80% of dividend increasers could see the best results in growth. That also means not necessarily looking for the dividend stocks with the highest dividend yield.
Instead, the study recommended looking at the payout ratio. It found that dividend stocks offering the highest dividend increases may not be sustainable. These stocks averaged a payout ratio of 74% during the period. Meanwhile, the second-highest level remained around 40%.
What this means is that dividend stocks need to put more of their cash towards dividends on a regular basis. Over time, and in times of trouble, this could cause dividend stocks to need to cut the dividend. And a cut can be seen as a sign of weakness, causing shares to drop. Meanwhile, the second-highest dividend stocks would have enough cash saved to keep dividends coming.
An option to consider
A stock that ticks a lot of these boxes is Lundin Mining (TSX: LUN). Of course, no stock is absolutely perfect, but Lundin stock is pretty close. The dividend stock offers a 58% payout ratio, averaging around 40% over the last decade. During that time, it increased its dividend by 110%, so not a huge amount but not low either.
Furthermore, the company has seen returns of 142% in the last decade alone. That’s compared to the 50% seen by the TSX during that same period. So, now you can grab a 3.22% dividend yield and, based on its history, likely continue to see strong returns as well as continue seeing a dividend come through!
Of course, there are a lot of other factors to consider, and you should always do your own research. But the point here is that if you want strong returns, don’t just rush to the first growth stock you see. For long-term growth, consider finding dividends with a long history of strong dividend increases. They’ll have enough cash to move forward while still paying you to hold on tight.
