Portfolio income is the first source of portfolio return and, in our opinion, the most predictable.   

As long-term stock investors, we know that total return has two components: 

Income + Price Change = Total Return

Over the last 100 years in the United States, price appreciation has been the larger component of the average annual total return for stocks. However, we know that the range of annual price changes has been large and, in some years, negative. While a company’s share price changes over time, the amount an investor realizes won’t be set until the shares are sold.

But, dividend income is always a positive value. This is because cash dividends paid are just that—cash. When a company pays you $1 in dividends, you get $1. Once received, a shareholder can spend or reinvest the dividend as they see fit.  

Investors receive dividend cash over the life of their investment, not just when the shares are sold. For the majority of the dividend-paying companies traded on United States exchanges, dividends are paid quarterly or semi-annually. A long-term investor is likely to receive dozens of dividend payments over many years. And many companies have well-articulated dividend payment policies which help investors plan. For these reasons, we think that dividend income is both the first source and most predictable source of portfolio return.  

It is often the case that mature and stable businesses choose to pay dividends because they are generating profits in excess of their reinvestment needs. It is somewhat obvious that an unprofitable business will find it difficult to pay a cash dividend. For this reason, we find that in addition to the security of receiving a cash payment, dividends are positively related to business stability as well.  

And so, all other factors held constant, we favor dividends as a source of near-term returns, as a contributor to long-term gains, and as evidence of business profitability and stability.