Dividends for the Long Run

As expected, the Fed raised the Fed Funds rate another 0.75% in its attempt to catch up with its tardy response to soaring inflation. Real GDP (after inflation) was reported and was the second straight quarter of negative growth, which is a rule of thumb definition many use for a recession. We think it is unlikely that the US is in a recession, at least not yet. Industrial production rose at a 4.8% annual rate in the first quarter and at a 6.2% rate in Q2. Unemployment is lower now than at the end of 2021. Payrolls grew at a monthly rate of 539,000 in the first quarter and 375,000 in Q2. If we were already in a recession, none of this would have happened. That’s why the National Bureau of Economic Research, the “official” arbiter of recessions, uses a wide range of data when assessing whether the economy is shrinking.


In addition, it’s important to recognize that once a year the government goes back and revises all the GDP data for the past several years. That happens in July, and given the strength in jobs and industrial production, it wouldn’t surprise us if the first quarter is eventually revised positive.


Meanwhile, cash dividends paid set another record in the second quarter, despite the drop in stocks’ market value. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said he expects dividends to set new records in the current quarter and for the year as well. Businesses want to send a message to investors that they are in good health. If they can maintain their dividends and grow their dividends, despite the challenges, that tends to signal that they’re confident about their business outlook.


Companies that increase their dividends every year for at least 25 years are considered “dividend aristocrats”. Obviously, for a company to be able to achieve such a record over a period which encompasses recessions and bear markets, it must have a great business model and generate a growing stream of free cash flow. Dividend aristocrats have outperformed the markets over time, including in periods of higher inflation and recession. Since 1957, dividends have grown by an average of 5.7% per year, more than 2 percentage points above the rate of inflation (represented by CPI – the Consumer Price Index - in the graph below).



While dividends have grown nicely this year, stocks have gone on sale, selling for prices 12.3% lower than at the start of the year. Jason Zweig, writing in the Wall Street Journal, noted that investors often miss these opportunities:


I like to say that the problem with stocks is that they contain the letter T. If they were called socks instead, people would treat a 20% decline in price not as a selloff but as a sale.


When socks get 20% cheaper, you don’t rush to get rid of the ones you already own; you check your sock drawer to see if you need a few more pairs. Investors should treat stocks the same way.


Sometimes it’s helpful to take a step back and look at the big picture, particularly when it comes to investing. The ‘little’ picture is what happened yesterday, or last week, or the first or second quarters of the year. The big picture is something quite remarkable: the long-term trajectory of stock values, which are the result of millions of people coming to work every day to add value, incrementally, day by day, to their companies.


The table shown here not only gives you the big picture of returns since the 1930s—the result of all that labor. But it also shows, how those returns decline substantially when missing the best 10 days of a decade.


Focusing on the ‘little’ picture is natural and normal—and also tends to lead to making decisions that are not ideal in the long run.


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