Don't Forget About the Dividends. They Still Matter a Lot.
Why dividends remain one of investors' strongest allies when markets turn bearish...
Hi, Investor 👋
I’m Jimmy, and welcome to another edition of our newsletter. If you’re the kind of investor who plays the long game, today’s piece is for you.
I’ve pulled together a deep dive into why dividends matter more than you think - not just as cash in your pocket, but as a driver of long-term returns and a crucial piece of disciplined investing.
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In recent years, dividends have often taken a backseat to more headline-grabbing themes:
AI-driven rallies;
High-growth tech stocks; and
Speculative assets.
In both 2023 and 2024, the S&P 500 posted impressive gains, largely driven by a small group of companies with little to no dividend yield.
For many investors, this renewed focus on price appreciation might make dividends seem like an afterthought.
But ignore dividends at your own peril…
Behind the scenes, dividends have continued to quietly and powerfully drive long-term returns.
In fact, the compounding effect of reinvested dividends has historically been one of the most important contributors to total shareholder wealth.
The chart below makes that abundantly clear:
If you had invested $100 in the S&P 500 in 1980, and simply held it without reinvesting dividends, your investment would have grown to around $4,860. Not bad, right?
But if you had reinvested those dividends along the way, your $100 would be worth $22,065. That’s more than four times the return - thanks entirely to dividends and the power of compounding.
Let’s break down why dividends still matter so much, and why dividend growth investing remains one of the most powerful - and underappreciated - strategies in the investor’s toolkit.
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1. Reliable and Compounding Growth:
Dividend investing isn’t just about income; it’s about reliable, compounding growth.
Companies that consistently raise their dividends often do so because they have solid, recurring cash flows and disciplined capital allocation. These companies tend to be mature, financially sound, and focused on long-term shareholder value.
When companies increase their dividend payouts year after year, investors benefit in three key ways:
Rising income: Just like getting a raise at work, a growing dividend provides an increasing income stream that can help outpace inflation.
Stronger fundamentals: Regular dividend increases often reflect confidence from management in the company’s financial health and future prospects.
Price appreciation: Over time, share prices tend to follow earnings—and companies that grow dividends are usually growing earnings too.
Reinvesting those growing dividends allows investors to buy more shares, which then earn more dividends, creating a virtuous cycle. That’s the magic of compounding in action.
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2. Resilience in Down and Flat Markets:
One of the most underappreciated aspects of dividends is the defensive buffer they provide during market drawdowns.
In a bear market or a sideways market, price returns may be flat or even negative - but dividend payments still hit your account, providing a source of positive return when little else is working.
Historically, companies that pay and grow dividends have tended to outperform in down markets and flat periods…
A study published in the Journal of Corporate Finance found that dividend-paying stocks outperform non-dividend-paying stocks by 1 to 2% more per month in declining markets than in advancing markets.
In fact, large-cap dividend growers have shown the ability to capture much of the upside in bull markets while losing less during downturns. They may not soar the highest during speculative frenzies - but over full market cycles, they often win the race.
This downside protection stems from a few structural advantages:
Cash discipline: Companies that commit to paying (and growing) dividends must generate free cash flow reliably, which forces fiscal discipline.
Lower volatility: Dividend-paying stocks, particularly those with a track record of consistent growth, tend to be less volatile and attract long-term investors.
Investor loyalty: A dependable dividend stream encourages investors to stay the course, even in turbulent markets.
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3. A Realistic Path to Financial Independence:
Dividend-paying stocks can offer something that few other strategies can: a predictable, scalable income stream that doesn't require selling your assets.
That’s the core of the FIRE movement - Financial Independence, Retire Early. And dividends are one of the most underrated tools to get there.
Unlike growth stocks, which often require you to sell shares to fund your lifestyle, dividend-paying companies let you live off the cash they generate. Your capital stays intact, and your income keeps flowing.
As your portfolio grows and dividends compound, you’re not just chasing net worth - you’re building cash flow. Over time, that flow can cover expenses, replace a paycheck, and eventually fund early retirement.
No timing the market. No needing to sell into volatility. Just steady, growing income from real businesses generating real profits.
It’s financial independence - one dividend at a time.
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Reminder: Not All Dividends Are Created Equal
Of course, it’s important to make a distinction: chasing high-yield stocks isn’t the same as investing in quality dividend growers.
High yield alone can be a red flag, often indicating distress or a declining business.
Dividend growth typically signals financial health, cash flow stability, and shareholder alignment.
Investors should focus on companies that consistently grow their dividends - not just those offering the highest yield today. This growth indicates strong fundamentals, while also increasing your yield on cost over time.
A stock that yields 2% today might yield 5-6% on your original investment in a decade if the dividend continues to rise. That’s real compounding at work.
Conclusion: Dividends Still Matter - a Lot
In a world obsessed with innovation, tech narratives, and headline-grabbing price moves, dividends might seem old-fashioned.
But the data says otherwise…
Since 1930, dividends have accounted for about 40% of the total return of U.S. stocks. And over longer periods, that contribution only grows more significant.
Dividend reinvestment it’s the engine behind long-term compounding.
While the next wave of excitement may come from AI or clean energy or space exploration, remember that steady cash flow, rising payouts, and disciplined capital allocation are still the building blocks of wealth.
So yes, dividends still matter - a lot.
And for the patient investor, they may be the most important thing of all.
Cheers,
Jimmy
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