Growing Income and Wealth with High-Dividend Equities

Growing Income and Wealth with High-Dividend Equities

Growing Income and Wealth with High-Dividend Equities

September 9, 2014

by C. Thomas Howard, PhD

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There is considerable evidence that high-dividend equities have significant advantages for growing income and wealth. In particular, a high-dividend-equity strategy addresses three major income concerns: getting sufficient yield, keeping up with inflation and outliving available funds. Such a portfolio produces higher income per dollar invested, growing income and principal over time, higher total returns, lower volatility and a reduced risk of outliving savings. I will address each of these advantages separately.

Higher income per dollar invested

A high-dividend-yield portfolio can produce two to three times the income per dollar invested versus a traditional low-default-risk bond portfolio. This means a smaller portion of an investor’s portfolio is dedicated to income generation. For example, a $1 million portfolio invested in 10-year Treasury Bonds generates, at current interest rates, about $25,000 annually. On the other hand, the same amount invested in an equity-dividend portfolio yielding 6.0%1 generates $60,000 annually, or more than twice the T-bond portfolio. In addition, dividend income grows over time while bond income remains the same.

Dividend growth keeps up with inflation

Unlike the income produced by fixed-income securities, equity dividends grow at a rate likely to exceed the inflation rate. Not only do investors start with more income per dollar invested, but dividend income will likely provide a longer-term inflation hedge.

Figure 1 shows S&P 500 dividends for January 1976 through June 2014, while Table 1 shows annual statistics. This time period was particularly demanding for equities and dividends, with the high inflation of the late 70s and early 80s, the three-year 2000-02 market decline, the market crash of 2007-09 and the worst dividend decline since World War II occurring in first quarter of 2009. In spite of these challenges, dividends proved to be an excellent income source over this time period.


Each series is scaled to equal 100 in January 1976. S&P 500 Index does not include dividends. S&P 500 dollar dividends are trailing 12-month totals. CPI Inflation is the All Urban Consumers, All Items index. Sources: Thomson Reuters Lipper, St. Louis Federal Reserve FRED database.

Table 1: Jan 1976 – Jun 2014 Annual Statistics (%)


Growth Rate

Standard Deviation

Max Drawdown

S&P 500 Index

8.03 (11.3)*



S&P 500 Dividends




CPI Inflation



* Total S&P 500 annual return including dividends.

Strikingly, dividends grew almost as fast as did the index (6.16% versus 8.03%), at less than 1/10 the volatility (1.4% versus 15.0%). Both the index and dividend growth easily surpassed this period’s 3.86% inflation. S&P 500 dividends provided a reasonably stable, growing source of income that more than offset the rising cost of living.

Dividends are largely unaffected by the many ups and downs of the market. Just because the equity market drops does not mean that dividends will experience a similar drop. This is an important relationship to remember, since in order to feel comfortable with dividends as an income source, it is necessary not to get emotionally caught up with the short-term ups and downs of the market. The fact that dividends had only a small response to market volatility provides an emotional buffer for the investor.

Some may find it surprising that dividends grew so consistently over time. The reason is that dividend decisions are based on the future prospects of the company, which in turn are dependent on the future prospects of the economy. Year-to-year dividend growth is more reflective of stable economic growth than emotionally charged market volatility.

Thus it should not be surprising to discover that most companies pursue a policy of growing dividends. Research shows that companies increase dividends 60% of the time, keep them unchanged 36% of the time and reduce them only 4% of the time. That is, increased and unchanged dividends outnumber decreased dividends by 27 to 1. While dividend reductions or, worse yet, dividend suspensions are a concern of many, the reality is that they are quite rare and their impact can be largely eliminated within a properly diversified portfolio.

  1. Our research, as well as actual portfolio management experience, confirms this rate is achievable and sustainable by means of investing in a diversified portfolio of high yield equities.

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