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Focusing on the right thing with investing

Focusing on the right thing

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It certainly can't have escaped your notice that the shares in the top companies of Australia and the world got hit mighty hard last year. The extreme volatility has dominated the news headlines, adding fuel to the post Covid uncertainty.

2022 could have gone into the books as an unrelievedly ‘bad’ year, indeed quite the worst one since the onset of the Global Financial Crisis in 2008. But of course, that isn't the case because the share prices are just one aspect of their total return.

The other is dividends - the actual cash disbursements companies make to their owners (shareholders) out of their earnings, and the income on which many retired investors are living. In 2022, those dividends went up just shy of 11% from 2021. You read that right, last year's S&P 500 cash dividend was 10.8% higher than 2021's. (It was the 13th year in a row that dividends went up, and the 11th consecutive record high.)

That's sort of what dividends do, and indeed it only makes common sense: since in the aggregate the 500 companies in the Index have significantly increased their earnings over time, they've been able - and quite willing - to reward their shareholders by raising their cash dividends. 

This wasn’t a one-year wonder. In the last 50 years - beginning with the annus horribilis 1973, the dividends went up because the earnings went up - more than 18 times.

Well fine, in fact pretty terrific. But in the next breath, you might very intelligently ask: how much of that dividend increase was lost to the erosion of purchasing power? In other words, how much did the cost of living go up in those 50 years? The answer is that the Consumer Price Index increased 6.4 times, from December 1973 to December 2022.

If that's starting to look to you like the S&P 500's cash dividend has quietly gone up, this half century past, close to three times more than has the cost of living, I'm happy to confirm that you're reading the situation just exactly right.

You may wonder why no one (apart from your financial planner, who may have to be restrained from shouting it from the housetops) has ever reported this to you. Permit me to speculate: (1) It's a pure goodness, and financial journalism tends to devote very little space to purely good things. And (2) it isn't really “news”, but rather a cumulatively very powerful truth.

So, if some bank you'd never even heard of busted out today because it lent a bunch of money to some crypto bros, be assured that that's just about all you're going to be reading and hearing about for a while. Indeed, I can pretty much guarantee that “Tortoise continues inexplicably to beat hare” won't ever be the big headline on your financial “news” feed, so you needn't bother looking for it.

Here's why an 11% jump in the cash dividend in spite of any temporary declines in the share prices, should have been every long-term equity investor's key takeaway from 2022:

For the pre-retirement investor - trying with all his/her might to accumulate enough capital for retirement - it's because a significantly increased stream of dividends was being reinvested at significantly reduced share prices. That's the great (though somehow not obvious) beauty of compounding, as you make most of your money in a bear market; you just don't realize it at the time.

And of course, for retired investors, it's how their increased income may well have stayed ahead of their inflating living costs. CPI inflation was pretty dreadful in 2022, but it was nowhere near 11%. Remember: it isn't your account statement you'll be taking to the supermarket throughout perhaps three decades of retirement; it's your income.

Just one man's opinion, I guess. But if people looked up their dividend income every 90 days instead of checking their account balances every 90 minutes, they just might become markedly more successful investors.


Article by Michal Bodi

Senior Financial Planner | Partner



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General Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please seek personal financial advice prior to acting on this information.