A Little Outperformance Goes a Long Way, Long Term
Granted, 2% or 3% in extra returns can easily be replaced by just one or two more profitable trades. If you were overweighted in Apple (NASDAQ:AAPL) across 2011, for instance, the tech giant’s 20% gains could have easily skewed you into market-beating returns.
But consistently making moves like that is a tall order. And over the long term, squeaking out that extra 2% or 3% annually can supercharge your portfolio.
For instance: While everyone likes to talk about how the S&P 500 finished flat for 2011 or call the index “dead money” going back 10 years, these statements oversimplify the numbers. True, the index’s nominal reading may be at those levels. But when you consider the “total return” with dividends included, the results are much different.
Consider that while the headline S&P reading is up around 70% since 1997 (from roughly 750 to a current reading around 1,300), when you add in dividends the index is up almost 120% in the same period!
Again, you could have replicated those returns with some savvy buys. But if stock-picking was easy, we’d all be millionaires. So, unless you’re supremely confident in your abilities, it’s a safer bet to rely on dividends for long-term outperformance.
What Else Is There?
Perhaps the most compelling reason to invest in dividend stocks right now is that there aren’t a lot of alternatives.
U.S. Treasuries with a 10-year maturity now yield a paltry 1.86%. That doesn’t even keep pace with inflation — though it’s admittedly better than cash, which delivers zero return.
Gold hit a record in 2011, and then plummeted. It’s now trading 15% below its peak despite a recent rebound. Commodities are notoriously volatile, and gold is no different.
The stock market has been swinging wildly up and down as the euro zone debt crisis and looming presidential election whipsaw sentiment-driven runs largely unrelated to the news. Risks are awfully high right now if you’re going to bet on a stock delivering profits on share value alone.
But most dividends offer a reliable stream of income for your retirement funds. Even if share prices drop in the short term, you’ll keep getting paid.
Of course no investment is risk-free, and not even blue-chip dividend payers are a sure thing. There are always dividend horror stories like General Electric (NYSE:GE), which slashed its payout by two-thirds at the height of the financial crisis. Or stocks can crash, offsetting any quarterly paydays you get.
But dividends offer a reliable stream of income for your retirement funds. Even if share prices drop in the short term, you’ll keep getting paid. The environment right now seems to favor dividend investments above all others — especially for those who believe in a buy-and-hold strategy.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.