Actions Speak Louder Than Words

Dividends are actions that speak louder than words.

In just about every area of life, words are important. Truthful words can be a huge encouragement, help, protection, and guide. But words by themselves are often just empty and often come up lacking. Take most politicians, for example. Many promises about a brighter future and big solutions are often just words. If we have patience, we will see the dawning of a grand new day. Those promises, however, start to take on meaning and substance when you begin to see the steps taken to fulfill the promise.

The same is true in the world of investing. Companies, fund managers, and those that analyze a business foretell great things for the future of a business. Sadly, many of those fortunes become less dazzling, alluring, and impressive over time. The stock will “double in price” in the next two years is the promise, with some fine print warning “past results are no guarantee of future returns.” Dividends, I would suggest, are actions, not just words.

Another Type of Investment Promise

Many companies pay their shareholders a dividend based on some portion of the profit the company received. Some companies have a history of paying increasing dividends each year, for many years. While it is impossible to guarantee future dividends, it is also true that it is impossible to guarantee that stock prices will rise as forecast or promised.

Therefore, while you are waiting for the grand day when your investment doubles in value, which may never happen, it is nice to be given a share of the profits. These can be given monthly, quarterly, or (as is the case with many international companies) annually.

Why Does this Matter?

A dividend is money in your pocket. It is a quantifiable and known return. If the company declares a dividend of $0.50 per share, you will receive the fifty cents for each share you own. This then becomes a useful asset. Your shares, if they don’t result in dividends, have value. However, you cannot spend the value until you sell some or all of your shares.

Secondly, a dividend is locked in. Capital gains are vapor. You might think the $10 shares will be worth $15 someday, but someday may never come. Many things can happen to a company or the economy or customer demand over time. Those things can turn a gold mine into a coal mine. Dividends are the minerals extracted from the mine, so no cave-in can destroy what you received.

Dividends also say something about a company’s management. There are many things a company can do with their profits and their cash hoard. They can buy other companies, increase their production capabilities, expand their marketing efforts, explore a new mine, increase research and development of promising products or solutions, and even pay down debt. Those are all potentially good things for the long-term future and growth of the company. A dividend, however, tells you management understands that not all capital expenditure opportunities using the profits are of equal value. Sometimes the best use of the profit is to pay the owners of the business. The shareholders are the owners.

The Hidden Benefits of a Dividend

Investors often overlook the obvious. Don’t miss the obvious benefits in using a dividend strategy. When I receive a dividend, I have at least three choices. The first is that I can spend it. The second is that I can give it away. The third is that I can reinvest the dollars. The third one has great power because, if it is invested in dividend-paying investments, the size of the next quarterly dividend will usually be greater. If you do that every three months, every year, for ten or more years, you will find your dividends growing “faster than you can spend them.”

The second hidden benefit is that you don’t have to change your investing strategy when you retire. Many advisors want to help you transition from growth stocks to dividend-paying investments when you retire. If you are already using the dividend strategy, very few changes are needed.

A third hidden benefit is that you will likely have shares in the companies and the ETFs that are worth more than what you paid for them. In other words, most good dividend stocks grow in value at the same time that they are paying increasing dividends. Dividend investors are not stupid, but they are patient.

Full Disclosure

Be skeptical. Ask, “does this really work?” Don’t just listen to the words, see the actions played out over time. To help illustrate the power of dividends, let me share two images with you. The first shows our top ten investments by current value. The second shows the top ten investments by total annual dividends.

You should be thinking, “yeah, but…does this dividend growth strategy really make a difference?” Good question. Look at the following image.

Notice how little of our total investments, as a percentage, are in cash or CDs. Cash does not increase in value.

Notice what has happened to our income from our investments (dividends and interest) from 1999-2022. Notice the change in the percentages from year to year. (I changed our strategy to dividend growth in 2009 and determined that holding cash was a bad strategy.)

Then compare the column that says “Account Balance Change %” each year with two major indexes: The S&P 500 and the NASDAQ. While it is true that a growth strategy can be powerful, don’t lose sight of the fact that we also spent a lot of our dividends. Those “disappeared” from our investment accounts, so our returns are actually better than what these numbers declare.