Market Curiosity: Exploring Markets And Systems

February 25, 2011

Dividends: Dan Ferris, Michael Mauboussin

Filed under: Just Watching — Tags: , — Jeff Fitzmyers @ 2:01 pm

Ned Davis compared the returns of all the stocks in the S&P 500 from 1972 to 2004…
Non dividend-paying stocks: 4.3% per year
Dividend cutters or eliminators: 5.2% per year
Dividend payers with no change in dividends: 7.3% per year
Dividend growers and initiators: 10.6% per year

But in practice, dividends don’t make most people rich because…

Michael Mauboussin: The assumption of full dividend reinvestment is rarely valid in practice. Mutual funds collect and reinvest the dividends from the companies that they own, but they have latitude in how they reinvest them. In addition, there is no evidence that dividends from a particular company are reinvested back into that company’s stock dollar for dollar… The story is even less optimistic for individual investors. Estimates suggest that investors who directly own individual stocks reinvest less than 10 percent of the dividends they receive. This is in spite of the fact that most companies offer a dividend reinvestment program at little or no cost.

The simplest formula I know for getting rich is: Keep income > outgo, and use a longterm way to compound the savings that works for you. I like selling puts on dividend producing timber stocks.

1 Comment »

  1. For dividends to work as part of your long-term returns, you must reinvest them.

    Great post!

    If you’re looking for more Michael Maubossin’s work, I found a good site: http://eurosharelab.com/michael-mauboussin-resource-page

    Comment by xuzhu — February 28, 2011 @ 7:00 am


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