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With the markets blood pressure rising, it reminds us of what flight attendants often say, Ladies and gentlemen, the Captain has turned on the fasten seat belt sign. We are now crossing a zone of turbulence. Please return to your seats and keep your seat belts fastened. Thank you. Likewise, as your Financial Captain, we know there may be market volatility along the way, but, as always, were focused on trying to help you arrive safely at your financial destination.
Data as of 9/23/11 Standard & Poor's 500 (Domestic Stocks) DJ Global ex US (Foreign Stocks) 10-year Treasury Note (Yield Only) Gold (per ounce) DJ-UBS Commodity Index DJ Equity All REIT TR Index
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barrons, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
AN OFTEN OVERLOOKED ASPECT OF SUCCESSFUL STOCK INVESTING is the importance of dividends. In bull markets, investors tend to focus on price appreciation, meaning, they look for stocks that can increase in price. In heady times like the late 1990s, investors feasted on stocks that would double or triple in a matter of months. Watching a stock go from $20 a share to $40 or $60 a share is exhilarating and makes for good cocktail party chatter. On the other hand, watching a stock sit at $20 a share for several years while you collect and reinvest a 3 percent dividend is rather boring and not worth sharing on the social circuit. However, just like the old story about the tortoise and the hare, the slow and steady growth of dividends plays a very important role in making money grow over time. The past 10 years is a great example of how dividends have helped improve the returns of an otherwise disappointing stock market. Heres the data: For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 1.3 percent excluding reinvested dividends. For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 3.6 percent including reinvested dividends. As shown above, receiving dividends and reinvesting them added 2.3 percentage points per year to an investors return compared to the return generated by price appreciation alone of the underlying stocks in the S&P 500.
In todays environment of low returns, finding a way to possibly eke out an extra 2.3 percentage points of return per year is attractive. Over a longer period, receiving dividends and reinvesting them has accounted for one-third of the total return of the S&P 500 index over the past 80 years, according to Standard & Poors. Standard & Poors also points out the following benefits of dividends:
Dividends allow investors to capture the upside potential while providing some downside protection in the down markets. When bond yields are low, like they are now, dividend paying stocks might be a way to enhance an investors current income.
Just like any other investment, though, you need to figure out how dividends fit within your overall investment strategy. Are you looking for dividends to provide stability, income, or growth within your portfolio? Or, perhaps its some combination of all three. Considering how dividends fit within our clients portfolios is just one more way that were trying to add value.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods. * Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. * Past performance does not guarantee future results. * You cannot invest directly in an index. * Consult your financial professional before making any investment decision. * To unsubscribe from the Monarch Report please reply to this e-mail with Unsubscribe in the subject line, or write us at kirsten.l.feinson@lpl.com.