Dividends are of a great importance to investors.
A dividend represents the actual cash returned to the investors in relation to their ownership of the company.
The total real return investors receive can be decomposed into two components:
A. The dividend yield, and
B. Any change in valuations over the holding period.
Of course, during the latest long bull market, dividends became a "Dirty Word!" When earnings growth was seemingly invincible, only the "truly dull" would concern themselves with the miniscule returns embedded in the dividend yield.
It is easy to see how investors ended up in this situation. Looking at the years between 1995 and 2000, over 80% of the returns achieved were generated through multiple expansions - an unprecedented contribution from these elements! Such occurrences have never before happened.
Multiple expansions mean the increased values that investors put on the value of earnings. That means that the rising P/E ratio and not the actual growth of earnings was responsible for 80% of the increase in the value of the stock market from 1995 to 2000.
However, people do tend to extrapolate the more recent past into any present and or future situations. So it is easy to see why investors tend to think that price appreciation is the best way of having returns.
On the other hand, a longer time horizon exposes the fallacy of this view. Taking a broader view of history shows that dividends are far more important than the experience of the late 1990s would suggest.
For instance, decomposing the returns from the U.S. market over the long run since between 1950 and 2000, almost 72% of the total returns investors achieved were delivered via the dividend yield!
