Understanding the Stock Market

An old definition of investing was getting INCOME, a return on investment, with little risk. Today, that definition is gone because speculation is popular. Income is supposedly bad, capital gains are good. The reality is annual total returns since 1820 have had around 35% to 40% of the total return from dividends.

“Payment of dividends to stockholders is the primary aim of managers of corporate industry and commerce. For this reason the value of stocks should be measured largely by dividend rates.” The quote was from the book Understanding the Stock Market written by Alliston Cragg and published in April of 1929. Times and preferences change. Today, some say the only good thing about dividends is some of them have a low income tax rate. This will change as baby boomers need steady income to live on rather than occasional capital gains.

Companies that raise their dividends over time will usually have their stock price rise and their price usually drops less than non-dividend paying stocks. With reinvestment of dividends, your investments can compound faster than no dividend reinvestment.