Dividend-paying stocks: why do long-term investors love them so much?

By Mark Hulbert

Few people appreciate dividend stocks' long-term appeal - but Warren Buffett does

Chalk up yet another quarter in which dividend increases increased significantly.

According to just-released data from S&P Dow Jones Indices, S&P 500 SPX companies paid out $151.6 billion in dividends during the first quarter, up from $146.8 billion in 2023's first quarter. Total S&P 500 dividends in calendar 2023 were 5.1% higher than 2022's total, and 2022's total was in turn 10.8% higher than in 2021.

Both of these calendar-year increases were higher than the inflation rate, which were 3.3% and 6.4%, respectively. That's not a fluke. Since 1871, according to data compiled by Yale University's Robert Shiller, dividends per share of the S&P 500 (or predecessor index) have grown 1.6 annualized percentage points faster than inflation. Furthermore, dividend growth's advantage over inflation has accelerated in recent decades: Over the last 50 years, they have outperformed inflation by 2.5 annualized percentage points, and over the last 20 years by 4.6 annualized percentage points.

This tendency for dividends to grow faster than inflation is why dividend-paying stocks are compelling for the long-term investor. Few are aware of this, however, since most of us focus only on the short term, and over shorter-term horizons dividend stocks can underperform the market.

This short-term underperformance has certainly been the case recently: The S&P 500 Dividend Aristocrats index XX:SP50DIV NOBL, which includes those companies in the S&P 500 that have increased their dividends for the past 25 consecutive years, has gained just 12.3% over the last 12 months, versus 29.1% for the S&P 500 itself.

But there's no denying dividend stocks' long-term appeal, even if few appreciate it. In last year's shareholder letter, Warren Buffett, CEO of Berkshire Hathaway (BRK.A) (BRK.B), referred to the long-term growth of dividend stocks' dividends as the "secret sauce" behind his company's long-term performance. As an example, Buffett referred to his purchase of shares of Coca-Cola (KO). "In August 1994...Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion...The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million."

Notice that total dividends that Berkshire Hathaway has received from its Coca-Cola shares far exceed what the company spent to purchase those shares. And yet all that Buffett had to do to realize this gain "was cash Coke's quarterly dividend checks."

Those of you interested in making long-term bets on dividend paying stocks may want to consider the issues listed in the table below. It includes those stocks currently recommended by the greatest number of the investment newsletters that my performance auditing firm monitors. The 10 stocks that appear in the table are listed in descending order of the number of newsletters currently recommending them and then in descending order of their current dividend yields.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

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04-08-24 1236ET

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