Dividends For Defensive Investors

Turning to dividend-paying stocks in times of market turmoil is not a new concept. In fact,noted analyst Benjamin Graham recommended shares of large, prominent and conservatively financed companies as a defensive equity strategy when he wrote The Intelligent Investor more than 50 years ago.

And with a population of nearly 80 million baby boomers starting to retire, this need for income will become even stronger. With longer life expectancies and the potential for rising inflation, income-seeking investors will need to make sure their money continues to grow.

Consider the facts uncovered in a Legg Mason Study:

Especially relevant to today’s volatile markets is the record of outperformance that dividend-paying companies have posted in down years for the market. Our chart below illustrates how, since 1980, dividend-paying stocks of S&P 500 Index have outperformed non-dividend-paying stocks in each year the broader index generated a negative total return. Dividend-Paying stocks have outperformed non-dividend-paying stocks in down years for the S&P 500 Index (%)

Especially in a difficult equity market, dividends do matter.

• For the defensive investor, dividends have the potential to cushion returns in a down market period, as they have in every down market period since 1980. Of course, past performance is no guarantee of future results.


• As illustrated the Legg Mason study of Standard & Poor’s “Dividend Aristocrats,” on the front side, companies with a long-term history of rising dividends have generated higher total returns with lower risk over time.


• Remember, too, that dividends have always been an important component of total return, especially when they are reinvested and compounded over time. As illustrated in the Legg Mason study, $1 invested in the S&P 500 Index from 1929-2008 would have grown to $37; but with the reinvestment of dividends, the same $1 would have grown to $929.
  
  Note: Past performance is no guarantee of future results. All
  investments involve risks, including loss of principal
  amount invested. Common stocks are subject to market
  fluctuations. Dividends and yields fluctuate and are
  subject to change. Yields and dividends represent past
  performance and there is no guarantee they will continue
  to be paid. While dividends may cushion returns in down
  markets, investments are still subject to loss of principal
  amount invested.

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