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Newsflash: The Dividend Aristocrats Found The Lost Decade

 May 02, 2012 05:11 PM
 


Introduction

There are many people who continue to hold a jaundiced view of stocks because they were traumatized by the last two recessions.  Precipitous drops in equity prices drove them to distrust stocks and stock markets.  However, I believe that most of the negative sentiment is a function of what I would describe as vague ideas about what really happened.  A lot has to do with many investors failing to recognize, or make the important distinctions, that were the true causes of our last two market crashes. 

The first market collapse (late summer 2000) was first a function of significant overvaluation, especially regarding the technology sector, followed by the mild recession of 2001. The second market collapse was the result of a greedy and fraudulently induced, and consequently, more serious recession dubbed the great recession of 2008. Therefore, at least in my opinion, the two huge drops in stock values were not really the result of a weak economy, as many people think.  The first was the result of an extremely inefficiently behaving stock market, and the second, the result of a greedy financial sector induced by poor government policy.

[Related -Boost Your Dividend Yield]

Nevertheless, these two major catastrophic events have shaken the confidence of many investors.  What bothers me about this is how it is driving people away from investing in our country's finest companies at precisely the time when I believe that it makes more sense to do so than it has in many years. Most importantly, the conditions that existed when these two market collapses occurred no longer exist.  Nevertheless, investors and pundits alike, continue to look for reasons why a market collapse will soon reoccur.  Their views are based on a pessimistic view of equities, and I believe an exaggerated view of the risk profile of stocks that was caused by the trauma.

[Related -United States Steel Corporation (X): Small Insider Buy, Big Rewards?]

Personally, I abhor pessimism, because I believe it is both an erroneous and dangerous mindset for investors to possess.  In a recent article, I mistakenly titled my introduction "pessimism is for losers" and therefore, inadvertently offended many readers.  Although I accept the responsibility that it was my fault for penning such a provocative statement, the offended readers misunderstood my intent.  I was not calling pessimistic people losers; I was attempting to articulate that a pessimistic attitude can create unnecessary losses.

Furthermore, many readers also mistook my words to mean that I was a "perma Bull" that was in denial that a future market collapse could even occur.  That is not what an optimistic attitude is actually about.  An optimistic attitude is about understanding and believing that even though a recession or market collapse can occur, both will inevitably end.  Therefore, both our equity markets and our economy will prosper and grow once again; it's only a matter of time.

But the real problem is that pessimists are most likely to sell at the bottom of the market and as a result realize unnecessary losses. Market bottoms have always represented great buying opportunities, that only an optimist is capable of exploiting. More simply stated, people usually sell their equities when the risk of owning them is the lowest and the opportunity for gain the highest. In other words, selling into the bottom of the market instead of buying into it as the optimist does.

Since 2000 Dividend Aristocrats Outperformed the S&P 500

I have come to learn that Dividend Growth investors, which have also been disparagingly referred to as Dividend Zealots, are among the most optimistic investors in the universe.  And in many ways, perhaps the most misunderstood.  Dividend Growth investors often state that they are not concerned with drops in the price of their stocks, but only that their dividends grow.  For some reason, this offends certain people who apparently feel that this makes Dividend Growth investors arrogant and/or even ignorant.

What these detractors misunderstand in my judgment, is that the average Dividend Growth investor does not worry about short-term volatility because they do not intend to sell. Dividend Growth investors buy in order to hold quality dividend paying companies for the long run, that have long histories of increasing their dividends every year. There are two popular sources of identifying the consistent dividend achiever.  They are the lists of Dividend Champions, Contenders and Challengers provided by David Fish found here, and perhaps the more widely known Standard & Poor's Corp's Dividend Aristocrats. Both the Dividend Champions and Dividend Aristocrats are comprised of companies that have increased their dividends for at least 25 consecutive years.

Since there are fewer names on the Dividend Aristocrats than there are the Dividend Champions (51 versus 103), I took the easy route and calculated the returns of the Dividend Aristocrats since calendar year 2000. Although we are now into our 13th year, thus going three years beyond the so-called "Lost Decade", the evidence of rebounding stock values is profoundly obvious. Not only did all but three of the Dividend Aristocrats dramatically outperform the S&P 500, they also provided very strong returns, that on balance, out-stripped inflation and even taxation.

I was motivated to run this study because of a comment that one reader made on my article (link provided above) as follows:

"The average S&P 500 index fund is down roughly 28% since 1/1/2000, after adjusting for inflation.  Add in dividends and that gets investors to nearly the breakeven point.


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