It's important for investors to know the basics, but many people only have a partial understanding of key ideas. One of these ideas is equity dividends, which may play a big role in the value of investing in stocks and could be considered essential for beating inflation over time. With the current inflation situation, it is a good time to think about what dividends are and how they fit into financial planning. This is the first article in a series that will cover basic investing concepts and how they apply to our clients. Here, I will cover what equity dividends are, how they typically function within mutual funds, and compare their long-term growth rate to gold and real estate, and inflation as measured by the Consumer Price Index (CPI).
Equity dividends are payments made by companies to their shareholders as a way of sharing profits. These dividends, usually distributed in cash, represent a portion of a company's earnings, and are paid out on a per-share basis. When shares are owned within mutual funds, the dividends are typically reinvested back into the mutual fund, resulting in an increase in the value of the investment. This strategy allows for compound growth, amplifying the benefits of dividendpaying stocks and mutual funds over time.
Equity Dividends vs. Gold, Real Estate, and CPI
To truly appreciate the power of equity dividends, let's examine their long-term growth rate compared to other popular investment options. We'll assess their performance against gold, real estate, and the CPI to illustrate the effectiveness of stock-biased portfolios in beating inflation.
Equity Dividends: Historically, global equity dividends have experienced a long-term growth rate of around 4-6% per year. For global stocks, using the MSCI ACWI as a benchmark, dividends have increased by approximately 430% over the last 30 years (1993-2022).i
Real Estate: Over the same 30-year period, residential real estate in the United States has appreciated by around 170%. This figure is based on the S&P/Case-Shiller U.S. National Home Price Index, with an assumed compound annual growth rate (CAGR) of approximately 3.5%.ii
Gold: Gold has historically been viewed as a store of value and a hedge against inflation. Over the last 30 years (1993- 2022), the price of gold has increased by approximately 340% with a CAGR of around 4.7%. While gold has its uses, its long-term growth rate has been lower than that of equity dividends.iii
Consumer Price Index (CPI): The CPI measures the change in prices of a basket of goods and services over time, serving as an indicator of inflation. From 1993 to 2022, the total increase in the CPI was around 104%, with an average annual increase of about 2-3%.iv
From this comparison, it's clear that equity dividends have consistently outperformed gold, real estate, and CPI in the long term. They have accomplished this while being more liquid and easier to transact with overall than other asset types. Equity portfolios offer a compelling opportunity to combat inflation and help secure long-term financial growth. As we have discussed in the past, preserving, and growing purchasing power is the essence of investing, so appreciating the long-term growth rate of dividends is fundamental for anyone with long-term goals.
Although this is a technical topic, I try to make complex topics simple to understand. I hope that I have succeeded in doing that here, as well as showing why dividends matter to you. If you would like to talk about dividends in more detail, or any other topic, please don't hesitate to ask!
Frank Hujsa, CFP®, CLU®
Partner, Acadium Financial Partners
Financial Adviser, RJFS
27499 Riverview Center Boulevard, Suite 108
Bonita Springs, FL 34134
Any opinions are those of Frank Hujsa and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Acadium Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. The information provided has been prepared from sources believed to be reliable but is not guaranteed by Raymond James Financial Services and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Dividends are not guaranteed and must be authorized by the company's board of directors.