Along with asset allocation, investors and their advisors face the tough but important task of choosing winning investments.
Some equate that quest with trying to find the next home-run stock, like Google. But a less risky approach is to find lesser-known stocks that regularly hit singles and doubles — and still cross home plate through price appreciation and dividend income, which often come on top of superior financial performance.
Dividends have a significant impact on a portfolio’s growth, says Jeff Saut, chief investment strategist with Raymond James in St. Petersburg, Fla. From 1965 to 1982, “Dividends played a huge role in total return,” he explains.
And Scott Thoma, a market analyst with Edward Jones in St. Louis, says the following example shows the superiority of using a total return approach to investing: If an individual invested $1,000 in the stock market in 1926 and only received the stock price appreciation, that original investment would be worth $111,180 today. Not a bad gain. But, that same investment made at the same time would have grown to nearly $3.1 million if dividends had been added to the investment mix.
The Research ’08 Total Return Leaders
Based on compounded annual price appreciation and dividends for the 10-year period ending November 15, 2007, for stocks trading at or above $2 in 1997:
- Aqua America (15.7%)
- Corporate Office Properties Trust (21.4%)
- Forest Laboratories (20.8%)
- MGI Pharma (30.3%)
- Oshkosh Truck Corp. (34.4%)
- Prologis (17.1%)
- Volvo (17.6%)
Source: Standard & Poor’s
Admittedly some tax provisions of the 1990s helped discourage dividend payments, analysts say. But not all companies discarded them. And current tax laws make it more palatable for investors to receive dividends.
While tax laws change often and frequently, the current set of breaks expires in 2010. What doesn’t change, though, is investors’ need for superior returns. And investing using total return as a way to measure success is extremely important as investors look for strategies to continue to grow and maintain their retirement portfolios, experts note.
This is particularly important to the Baby Boom generation on the cusp of retirement. Interestingly enough, many of these investors hope to preserve their principal and live off their earnings; as a result, they may be attracted to investments with high yields, says Mark Riepe, senior vice president, Schwab Center for Financial Research in San Francisco. Some investors can lose touch with the price of the securities, focusing too much on the dividend returns. “If the underlying securities keep eroding, when you net out, you are not necessarily in a good spot,” he says.
The recent surge in total return investing interest, however, is “more of an issue now, because I think people are seeing what happens when you chase yields. They see the risks involved in high yielding but risky securities,” Riepe adds.
He believes that younger investors are showing more affinity for total return investing. “They are more naturally interested in making principal grow and make the portfolio value as large as possible,” explains Riepe.