(Nasdaq) - As seasoned equity income investors know, dividends are vital drivers of long-term returns. By some estimates, reinvested dividends account for roughly a third or more of total returns over lengthy holding periods.
With that in mind, investors might want to take a look at recent commentary from Bank of America strategist Savita Subramanian, who says that dividends may be the only game in town when it comes to generating equity upside over the next decade. Pointing to frothy valuations, Subramanian notes that double-digit annual performances will be hard to come by for the S&P 500 and that reinvesting payouts will pay off for investors over the long haul.
“The simple act of reinvesting dividends could yield a total return equivalent to the S&P 500 at 6,000 in 2031, assuming long-term average growth and payouts,” Subramanian said in a recent note to clients.
Of course, dividend investing is a long-term strategy, and it's one made easier with quality strategies that emphasize payout growth. That speaks to the reinvesting dividends concept that Bank of America's Subramanian discusses above.
“While BofA's outlook is much bleaker than recent history, it would continue a decades-long trend of dividends driving much of the stock market's return. Since 1970, 84% of the total return of the S&P 500 can be attributed to reinvested dividends, according to data from Morningstar and Hartford Funds,” according to Business Insider.
Fortunately for investors worried about using dividends as primary drivers of returns over the next decade, dividend growth has recently been robust in the U.S. and is on a blistering pace that's carried S&P 500 payouts close to highs last seen prior to the coronavirus pandemic.
“Dividends are back as record earnings, sales, and margins have permitted companies to return to the business of returning shareholder wealth,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “Larger dividend increases and a lack of cuts produced a record payment to S&P 500 shareholders in Q3 2021. Based on current indicated dividend rates and schedules, Q4 2021 appears set to replace both that quarterly record and set a new annual record for payments in 2021.”
Investors that don't want to stock pick among dividend names can consider an array of exchange traded funds, include the SmartETFs Dividend Builder ETF (DIVS). DIVS is a potentially rewarding idea for long-term dividend investors because it focuses on quality companies with strong balance sheets and low debt burdens. Plus, it's actively managed, meaning that it can better avoid dividend offenders than some index funds.
