Why Dividends Matter? A Look Back At Dow Jones Industrials

Posted: 24 Jan 2008 | Categories: Investing

According to the research paper titled “The Dow Jones Industrial Average: The Impact of Fixing Its Flaws” Dow Jones Industrials Index has many flaws. But one of the biggest flaws that this paper cites is that if dividends were included in the Dow Jones Industrials, its value would be around 250,000 points in 2000, versus the 9,000 it was trading in 1999!

It is commonly known that it took the market 25 years to recover from its 1929 peak and the Great Depression. However the inclusion of dividends in the index mitigates the effects of the Great Depression. A new all-time high is reached in January 1945 instead of November 1954 if dividends are included. After the 2000-2002 bear market, it took Dow Jones Industrials 6 years and 2 months to surpass its 2000 all-time-high. If you add dividends to the equation, this time decreases to 4 years and 11 months.

To summarize, dividends should be considered an important part of ones portfolio. Financial advisers normally tell you that when you retire, you would be taking a 4% withdrawal rate from your nest egg each year. However, if you can achieve at least a 4% yield, that grows each year to at least cover the rise in inflation you would be able to weather any short-term and long-term weakness in the stock market. I would not recommend having a huge portion of your long-term portfolio in bonds, which are normally sold to retirees as a “safe and reliable source of income”. You do get a fixed payment every period or so, but the purchasing power of this payment declines over time. Thus a very good strategy over the long run is to create a diversified portfolio of stocks, that have shows consistency in raising their dividends year after year and which spot an attractive dividend yield.

You can find the research paper The Dow Jones Industrial Average: The Impact of Fixing Its Flaws on this site:(http://siepr.stanford.edu/Papers/pdf/99-16.pdf). For more information about dividend investing feel free to visit my blog at http://dividendgrowth.blogspot.com/

Article Author :Dobromir_Stoyanov