What Are Dividends, Anyway?
To consider just one example out of hundreds, let's look at the shareholder experience at Associated Banc-Corp over the past 20 years. At the end of 1986, shares of Associated sold for $4.08 apiece. Back then, Associated's dividend rate was running at just 10.6 cents a share. Dividing the 10.6 cents in annual dividends by the stock price of $4.08, we can say the stock provided a dividend yield of just 2.6 percent. The investor looking for income probably could have walked into one of Associated's bank branches and received a much higher rate of interest.
Dividend yields may look like interest rates, although neither the dividend nor the stock that is paying it has a fixed, guaranteed value. But unlike the interest paid on a bond or a CD, Associated's dividend payments rose every single year thereafter. (See Figure 1.1.) Despite the initial yield of just 2.6 percent, just look how those dividends accumulated!
By 1999, Associated had paid out cash dividends equal to the purchase price of the stock 13 years earlier. Seven years later, by the end of 2006, those cumulative dividends were 2.5 times the 1986 stock price. In 2006 alone, payments totaling $1.14 a share were equal to 28 percent of the 1986 purchase price. And even this was not the end: Associated raised its dividend yet again in early 2007. If history is any indication, many more decades of steadily rising payments lie ahead.
But before you focus too closely on this ascending pile of accumulated dividends, step back to visualize the peace of mind this kind of performance inspires. Between 1986 and 2006, a period containing some of the great bull runs of all time, I count three major bear markets, a number of smaller corrections, and four major stretches of rising stock prices. Yet for the truly patient holder of the stock through this whole period, these fluctuations mattered not one bit. I can't go so far as to say that a dividend strategy is maintenance-free, but it's hard to imagine a better way to have your money working for you, rather than the other way around!
And not only did Associated's rising dividend provide more and more income as the years rolled by, but each dividend increase made the stock more desirable to own. Those dividends drove the market price of the stock higher in tandem, as shown in Figure 1.2.
You may look at this chart and conclude that Associated's stock price alone might seem to have been a pretty nice investment; who needs dividends? But let's now invoke the concept of total return: capital gains and dividends working together to provide profits and build wealth. Associated's stock price rose an average of 11.3 percent annually over this 20-year stretch. Without dividends, that would have turned a $10,000 investment into roughly $85,000. But with dividends that same $10,000 investment compounds into a stake worth $161,000, nearly twice as much as from capital gains alone. The total return on the stock over these two decades was not just the 11.3 percent average annual capital gain, and not just the 3.2 percent average yield, but an average total return of 14.9 percent annually.
I chose Associated not because it is a spectacular example of success, though in its own way it certainly has been. Instead, Associated is noteworthy precisely because it is so ordinary. This bank may not be well known across the country, but it certainly is to hundreds of thousands of depositors and loan customers in Wisconsin. Dozens of seemingly humdrum banks in other corners of the country have generated similar performances, as have hundreds of firms in other industries. The unifying factors are growing dividends and the patience to collect them.
