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Many of you may already know that I am a big proponent of dividend growth in mainstream equities. What you might not know, however, is why exactly I believe this to be such a useful investment strategy.  

Since 1926, the Consumer Price Index has tracked inflation at a compounded annual average of three percent. This inflation rate has decreased the purchasing power of America’s retirees, the majority of whom are living longer than ever thanks to increased life expectancies. Future retirees are also affected; they will now need an income from their investments to sustain their lifestyle for longer periods.

Dividends from high-quality common stocks have been steadily rising and are an effective long-term weapon against rising inflation rates. The S&P 500, for example, has paid dividends that have compounded at an average rate of five percent annually since 1926.

If you and your spouse had just turned 50 and were beginning to consider retirement income streams, you might be interested in the following statistics. The S&P 500 cash dividend has increased nineteen times its price in 1973. The Consumer Price Index, comparatively, has increased seven times.

It’s important to note that we are not discussing the current yield, which has no bearing on the present matter. Instead, we’re looking specifically at how much the cost of living has increased over the last 50 years and how much the cash dividend income of a mainstream equity investor has grown to offset the cost of living. If you are interested in the current yield, however, let the record reflect that the price of the S&P 500 Index itself increased from 98 in 1973 to approximately 4,300 in 2023.

An astute reader might point out that the dividend increase noted above is more than five percent. That reader would be correct: since 1950, the rate of dividend growth has increased to an average annual rate of 5.7%. Even more impressively, that rate has risen to an average of 5.9% per year since 1980. This is approximately twice the rate of CPI inflation over the same time period.

Since 1980, there has been a new phenomenon of large-scale share repurchases in corporation finance. Many thought that corporate cash typically diverted to dividends may have gone to stock buybacks, thus slowing dividend growth. That hasn’t happened, which is truly remarkable.

Another interesting aspect of dividend trends is that they have taken, over time, a smaller share of corporate earnings even as dividend rates increased. If we use the same time frame, we can see that a $3.61 dividend in 1973 took approximately 45% of that year’s earnings. This year’s dividend is estimated to be $70, which is a mere 32% of annual earnings. Even better, in 2022, during which the S&P 500 declined 18%, the cash dividend went up 11%.

Dividend growth is certainly something all retirees should consider as they plan for their retirement income streams. With rising inflation rates and longer lifespans, dividends are one potential option. If investors checked their dividend income every three months instead of their account values every three hours, we might all be better off; we would definitely be calmer. If you have questions about dividends or your retirement portfolio, contact one of our talented financial planners at (469)212-8072 or gds@gdswealth.com.

Glen D. Smith
CFP®, CRPC® | Chief Executive Officer | Chief Investment Officer | Cofounder

GDS Wealth Management is an investment adviser in Flower Mound, TX. GDS Wealth Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. GDS Wealth Management only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of GDS Wealth Management's current written disclosure brochure filed with the SEC, which discusses, among other things, GDS Wealth Management’s business practices, services, and fees, is available through the SEC's website at: adviserinfo.sec.gov.

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