Are dividends the way to go in equities?

Are dividends the way to go in equities?

While many investors focus on capital gain as the main source of return from equities, history shows that long- term returns are enhanced a lot by the inclusion of dividends.

Just take the outcome of a US$1,000 investment in a portfolio of US equities since the beginning of 1970.

The capital alone has increased to US$13,474, but the total return - which includes dividends and the reinvestment of those dividends - has risen to US$51,377.

The difference is accounted for by the benefits of compounding - that is to say, the amplifying effect of reinvestment.

However, this compounding effect can be further enhanced if an investor were not to focus just on any dividend- paying stock, but on companies that can grow their dividends, resulting in a "double compounding" effect.

For example, had you invested US$1,000 in the US stock market 10 years ago, your stake today would be worth US$1,980, including the reinvestment of dividends.

Now if you were fortunate enough to have put this money not in the broad market, but instead into an elite group of companies in the US called the "dividend achievers" - companies which have rewarded shareholders with a rising dividend every year for 25 years or more - your investment, on the same terms as above, would have increased to US$2,750.

That is a vastly superior return to simply investing in the index.

As a consequence, for this to work to greatest effect, you need to concentrate your money on companies that increase their dividends year in, year out - and stick with them for long periods of time.

Consistency and patience are what's required.But what about high-dividend yields, so often targeted by equity income strategies?

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