Let your cash flow

John Osbon - January 28, 2015

In this seventh year of zero interest rates, many investors complain that “there’s just no yield out there.” They must be looking in the wrong place. True, bond yields are dismal, but in the equity world there is a strong and growing dividend flow providing nice annual yields. With $1.2 trillion of dividends paid out worldwide in 2014, where is it coming from and how much of it should be coming to you?

You may be surprised to know that dividends have been growing at 8 percent per year for the last ten years. (All data from WisdomTree). VGK – the Vanguard ETF of big European stocks, for example, yields 4.6 percent and the current S&P 500 yield is around 2 percent. You can fake earnings, revenue, contracts and news but you can’t fake dividends. Once dividends are paid, they are yours.

The dividend world pie
Most dividends come from outside the US. Although US stocks pay out almost $400 billion dollars per year that is only one third of roughly $1.2 trillion of dividends paid worldwide. Where does the rest of the cash flow come from?

Global Dividend Stream

Dividends are growing
Over the long term – since the S&P 500 was established in 1957 – dividends have grown at 5.5 percent annually on average. More recently, dividends have been growing by 13.1 percent (one year) and 15.5 percent (three years).

On average global dividend growth for the last ten years is approximately 7 percent. Long-term dividend growth has been highest among emerging markets at 8 percent.

S&P Dividend Growth

Reinvest and reap the rewards
Einstein only reinforced his genius when he said “The most powerful force in the universe is compound interest.” Take a look at the role of dividends in total return of the S&P stocks – represented by the SPY ETF – over the last two decades. Price appreciation accounted for almost a 4x return over the period, but investors who maxed out compounding by reinvesting dividends raised their total return to more than 6x.

S&P Returns

A few facts and maybe a few surprises
The top 20 companies in the US pay out $142B. Number one is Exxon Mobil, followed by Apple and Microsoft. Apple, which from 1995 to 2012 paid no dividend at all, now pays out the same as all of South Korea ($11B). Russia pays out the same as Apple and Microsoft combined ($22B). JPMorgan pays the same as Poland ($6B).

What it means for you
Cash flow is a dominant characteristic of your portfolio. The zero interest rate environment makes cash flow via equity dividends a key element to discuss with your advisor. Are you getting your share of the big dividend pie? We’d be happy to look at your portfolio and help you answer that question. In the meantime, if you don’t need the cash for immediate expenditures, make sure all of your dividends are reinvested, Einstein-style.

John Osbon – josbon@osboncapital.com

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