My wife and I have two sons at home, 2.5 years old and 9 months old. Even at these young ages, we can see how different these two boys are. They look different and behave differently; they eat differently and sleep differently; they laugh differently and cry differently. Two brothers, same family, each unique in their own way.
I myself have two siblings, a brother, and a sister. Each of us three years apart in age, me being the youngest. We each have our different strengths and weaknesses. We have our own unique experiences and perspectives. Again, the same family, but all very different.
This reality is not unique to just me or my family. Since the beginning of time, families have been populated with a diverse set of individuals. From Cain and Able to the Kardashians.
Can you relate? How about you and your siblings – Similar? Different?
Today on TOM, I’d like to discuss two financial siblings that I am sure you are quite familiar with – Stock Prices and Dividends. These are two financial metrics that are of the same family but tend to behave and look quite different from one another.
Appreciation & Income
These two siblings – stocks prices and dividends – are bonded by this “family” equation:
Total Return = Appreciation + Income
This simple equation, total return being the summation of appreciation and income, can be used to explain most investment performance. For stocks, one can calculate their total return by adding the appreciation of the stock price and the dividend income for a defined time period. For real estate, a landlord would calculate total return by looking at the sum of the appreciation of the property plus the rental income collected.
Again, both siblings are part of the total return family, but their behavior couldn’t be any different.
Popularity & Personality
Reading this article, I am sure you have some siblings that come to mind, whether they are your own siblings or friends of yours. You probably have an example of a sister that is outgoing and talkative, while her counterpart is shy and quiet. One that likes to be center stage, while the other elects to work backstage.
For our chosen subjects in today’s discussion, Stock Prices always win the popularity contest. Every financial news outlet, social media post, and trading application are focused and centered around the movements of stock prices. The second by second, day by day updates of what the price of a stock is. Stock prices like to be centerstage.
When they [stock prices] are accelerating upward, they are painted green with greed and envy on our computer and television screens, and when the bottom falls out, they are dyed red as if they were bleeding to death. Stock prices, the drama queen of the two siblings.
Dividends are quiet and don’t demand much attention. They are even-keeled and always show up on time. Even when stock prices have an emotional outburst, dividends stay calm and comforting.
Same family, but unique as can be.
By The Numbers
My claims and descriptions above of how these two – stocks prices and dividends – behave, are not rooted in opinion, but rather are historically factual.
Let’s take a look at how these financial siblings have behaved over the last 61 years (1960 –2020).
Over those 61 years, stock prices (S&P 500) have depreciated year-over-year on 16 different occasions. That’s more than a quarter of the time. The results along the way, whether depreciation or appreciation, have been wildly diverse. Years like 2008 when the market depreciated more than 38% during that one calendar year or years like 1975 and 1995 when stock prices skyrocketed more than 37% in a single year. What a drama queen, right?
Dividends (S&P 500) on the other hand, have behaved much differently over those 61 years. Dividends have only decreased year-over-year 6 times in those 61 years. That is less than 10% of the time. And, if we zoom in further, this is what those 6 year-over-year dividend income decreases look like in percentage terms:
5 out of those 6 years representing a decrease of less than 4%, as opposed to the wild swings of the stock prices we referenced above.
Choose Your Friends Wisely
Ok, perhaps you find all of this a little bit interesting and maybe even the analogy is a bit entertaining as well, but you are asking yourself why does this matter? What does this mean to me?
Well, let me ask you this. Knowing what you know now, which sibling would you ask to take you to the airport for an early morning flight? Who would you ask to help you move? Would you ask Stock Prices or would you ask Dividends?
You would recruit based on reliability. You would hate to be stood up in a time of need. So, you would choose the sibling that is consistent, on time, and always shows up.
Your financial plan is no different. Reliability matters. What’s worse than missing a flight or being stuck to move all of your belongings on your own? I will tell you what’s worse, outliving your nest egg.
Building a financial plan that depends on dividend income to cover your lifestyle (expenses) is just prudent. In a world full of uncertainty and anxiety, reliability and consistency go a long way.
So… what does your financial plan depend on – stock prices or dividends?