The rational case for dividend investing

In this post-Enron/Arthur Andersen world, dividend companies already are inherently more safe than their non-dividend paying counterparts. They pay cash, they have real earnings.

Over time, dividend payers have historically outperformed other investments, with quite a bit less volatility — a win-win for investors (source: Fool.com).

I came across this piece, published by John Mauldin, under the Outside The Box umbrella.

Quick takeaways (bold is author’s words but my emphasis, while italics are my comments):

  •  Essentially, your total return is determined by two components – price appreciation and dividends – in any given year.
  • Dividends, which are typically spent and not perpetually reinvested, are the main reason that equity investors have achieved real returns well above the rate of GDP growth.
  • We’re nowhere near the peak levels achieved during the technology boom, but current levels still exceed the historical average of 16.5x, shown in the next chart. The market is overvalued.
  • Final take: With both US treasuries and equities offering poor future returns, where can an investor find adequate inflation-adjusted returns?With the announcement of QE4, the likelihood of significant inflation surfacing in the back-half of the decade has definitely increased. The best options for investors, in my view, are quality domestic and international equities with decent dividend yields, and precious metals. I may have missed the equity bubble of the late ‘90s and the current bond bubble, but the precious metals bubble is just getting started. I don’t plan on missing this one.

I’m playing with a fictitious portfolio. Here’s my latest article.

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