Can a DIY investor achieve superior returns than the index? The simple answer is a confident YES when a strategy of dividend investing is employed. Here is the evidence.
Dividends drive stock market returns
Dividends are a major component of overall stock market returns. According to a Hartford Funds white paper, over a 50 year time period, dividends accounted for over 80% of the total return of the S&P 500.
The evidence is equally compelling for Canadian markets.
Dividend paying stocks outperform
RBC Global Asset Management published data showing that over the last 30 years, a dividend- based strategy would have handily outperformed index-based strategies. As the table below shows, rom 1986 to 2016 dividend growers of the S&P/TSX had a compound annual growth rate (CAGR) of 11.7%. Dividend payers as a whole returned 9.9%. Non-dividend payers? . . . only 1.3%. Dividend-paying stocks have been the foundation of stock market returns.
How to choose dividend-paying stocks
But what dividend-paying stocks should you actually buy? We invest in large Canadian companies with relatively high yields (usually 3 – 6%) and a long history of consistent and rising dividends. A quick look at the 30 year returns of our “Beating the TSX” strategy illustrates the power of this method.