Beat the Market? There’s Only One Way to Do It
If you look at the stock market over the last dozen years or so, you really would not have done that well owning any of the major indices. The S&P 500 is trading at the same level it was back in 1999, so the notion of buy and hold in the stock market didn’t prove itself during this time period.
There are two keys to success in the stock market: timing and dividends. During the 1980s and ’90s, owning the S&P 500 was a hugely profitable endeavor; during the 2000s, it was not. If you break it down and look at individual stocks, timing (buying goods assets when prices are down) and dividends are the essential factors in wealth creation.
Consider a company like PepsiCo, Inc. (NYSE/PEP). If you pull up a very long-term chart on the company, you’ll notice that it has gone up a lot in value over time. But by time, I mean a long period of time. And for much of its history on the stock market, PepsiCo’s share did nothing. The only return you would have got was your dividend payments. The company’s recent stock chart is below:
Chart courtesy of www.StockCharts.com
According to the stock’s history, buying shares in PepsiCo during its major price retreats has proven to be a good investment strategy. If you took the company’s dividend payments and reinvested these funds into additional shares of the company, your returns over time would have been significantly higher.
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The stock market crashed because of the subprime financial crisis, with the S&P 500 hitting a low in March of 2009. Say, for example, you saw the stock market recovering and bought shares in PepsiCo in August 2009. Your simple return from then to now would be approximately 23%. But if you took all the dividends the company has paid from then until now and reinvested these funds into additional shares of the company, your real investment return jumps to approximately 36%. (Thanks to Morningstar.com for the numbers.) That’s a big difference, and it illustrates the importance of dividends to stock market returns.
Reinvesting dividends can turn a lackluster stock market into real wealth over time. (See “What Many Blue Chips Are Signaling.”) Right now, I would not be a buyer in this market. Expectations for revenues and earnings are flat. But if the current consolidation turns into a full-blown stock market correction, select blue chip names that pay solid dividends would be worth adding. It’s going to be low and slow for the next several years, so dividends will be the equity investor’s only friend.