How Dividends Make All the Difference

History tells us that dividends are a key component of investors’ total returns. In fact, dividends have contributed nearly 30% to the 10.4% annual total returns of the S&P 500 over the long run.

But as the Bob Dylan song goes, “The Times, They Are A-Changin’.”

The research team from the exchange-traded fund company, Wisdomtree, found the following:

• In the 1970s, a decade characterized by high inflation and weak economic growth, dividends made up 70% of total returns.
• The 1990s—the decade of the dotcom bubble—had the lowest contribution from dividends, of just 15%.
• The only decade with negative total returns was the 2000s. The dividend returns of nearly 2% provided a cushion to offset negative price returns driven by the bursting of the dotcom bubble and the Global Financial Crisis.

Wisdomtree also found that the dividend yield on the S&P 500 has steadily declined in recent years, lowering the expected return from this key component of long-term returns. It has been a growth-led (tech stocks) market over the past decade. That has led to the S&P 500 Index seeing a meaningful drop in its starting dividend yield of 2.0% to its ending yield of 1.5% over the past decade.

For me, this reality is what makes Tim Plaehn’s Dividend Hunter service unique. He finds dividend gems that are becoming increasingly rare (see below for how to join).

MLP Roller Coaster

One area where you can still find some dividend gems is in a sector that Wall Street loves to hate—energy, and more specifically, energy master limited partnerships (MLPs).

From mid-2014 until January 2016, oil crashed from around $100 per barrel to less than $30. The Alerian MLP Index dropped by more than 60% during the same period. Before the crash, MLPs paid out almost all of their free cash flow as distributions to investors. But the crash blew up the MLP business model of growth, paid for with new debt and equity.

The decline for MLPs continued as the companies restructured their businesses for lower growth going forward, so that, by the end of 2019, the financial picture for the sector was much improved. But then, in March 2020, the pandemic struck, triggering a crash for all high-yield investment categories, and MLPs dropped by more than 60% in a few short weeks.

The end result was that, from the 2014 peak to the March 2020 trough, the destruction on the MLP Index totaled 85%.

But then, from the nadir in the spring of 2020, MLP stocks soared. For example, Tim’s recommendation…

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