The Truth About Dividends

There are two types of Wall Street investors:   the capital gains (CG) crowd and the dividend devotees. The CG crowd is in constant pursuit of the next get-rich-quick stock. These investors buy stock in hopes the price shoots up so they can cash out and move onto the next shiny object.

You can name a million reasons why investors chase appreciation vs. dividends, but all you have to do is look at the financial media and social media buzz. Nobody talks about boring dividends. It's far more exciting to talk about a stock that shoots up 314% overnight.

Besides the bias towards capital gains investors encounter in the press and social media, the average investor - especially younger ones - treat stock investing like gambling. With short attention spans and even shorter investing attention spans, modern investors don't think long-term, but are more concerned with quick turnaround profits.  

Here's an uncomfortable truth the CG crowd doesn't want to hear. They're not very good at this strategy. When 90% of pros can't beat the market, average retail investors fare even worse - averaging about two points less annually than the S&P 500.  

Dividend devotees experience better returns than capital gains hogs.

According to Shark Tank's Kevin O'Leary, a big-time dividend devotee, "Over the last 40 years, 71% of the market's returns came from dividends, not capital appreciation."

I don't know where O'Leary got his numbers, but at least one other source echoed this disparity between dividend-attributed vs. growth-attributed gains. At one point, the heads of Black Rock's global equity team suggested that dividends and dividend growth have delivered 90% of US equity returns over the last century.

If your thinking is that because returns from dividends outpace capital gains that dividend rates must be killer, you'd be mistaken. In the last 20 years, the average dividend yield of the S&P 500 hovered around 2%. If we accept that dividends account for more of investors' total returns than capital gains, you have to wonder why reasonable investors put any money in the stock market.

Ultra-wealthy investors have consistently allocated more than 50% of their portfolios to alternative investments like private equity, private debt, and private real estate. 

Why? 

It's probably because they're not satisfied with earning less than 2% from dividends or even less from a timing strategy.

How much better are returns from private investments than public company dividends?

According to a 2019 Cambridge Associates report, the more an investor allocated their portfolio to private investments, the higher the returns on their portfolios. Those with 40% or more allocated to private investments saw an average annual return of 9.2%. Even those who only allocated 5%-15% to private investments saw an average annual return of 6.9%.

It should come as no surprise why elite investors seek private investments over Wall Street options like dividend stocks. Not only do private investments reward their investors more than public options, but they're less correlated to the broader markets - shielding diversified portfolios from downturns that dividend stocks don't offer.

Are you in one of the two Wall Street investing camps?

Are you investing in stocks for capital appreciation or dividends? If so, maybe it's time to take a close look at your portfolio.

Whether you're a part of the CG crowd or you're a dividend devotee, are you satisfied with an average annual dividend yield of around 2%? If you're chasing capital gains and find yourself constantly chasing timing, chances are you're earning even less than the average annual 2% dividend devotees are earning.  

Don't you want to earn more than 2% annually from your investments? Maybe it's time to invest in private investments.