The Wine Cellar - James Montier: Dividends Still Matter

One of the main things I am using the blog for is an ongoing notebook of my favorite insights on investing.  The Wine Cellar is the ideas, papers and analysis that are most useful and informs my perspective over the long haul.

So the first one to be added to the Wine Cellar of ideas is from James Montier's August 2010 paper "A Man from a Different Time"

Dividends still matter
To those who charge around in markets trying to guess
the next quarter’s make-believe earnings number, the
concept of dividends seems wholly irrelevant. However,
to those with an attention span measured in longer than
milliseconds – who are few and far between, to judge
from today’s markets – dividends are a vital element
of return. Exhibit 2 illustrates this point graphically.
Looking at the U.S. market since 1871, on a 1-year time
horizon, nearly 80% of the return has been generated by
fl uctuations in valuation. However, as the time horizon
is extended, “fundamentals” play an increasing role in
return generation. For example, at a 5-year time horizon,
dividend yield and dividend growth account for almost
80% of the return.

Having a long term orientation is fundamental for individual investors. I think the ability to have a longer time horizon is our single biggest advantage over the pros, we can be patient and wait out 3 years, 5 years for things to play out. Pros have a bad quarter and then they are updating their resume LinkedIn. They cannot wait it out.

But the time horizon advantage is amplified if we focus on approaches that unfold (albeit slowly) over time. This insight highlighted for me the importance not just of dividends, but dividend growth as the overriding factor in long term returns. If you are measuring your investing lifecycle in years and decades, not mouse clicks, milliseconds, and Cramerisms, then dividend growth is like having the wind at your back.

Dividend growth investing moves the focus from not just preferring higher yielding companies over those with low or no dividends, but more in the direction of companies that can grow their dividend by meaningful percentages year after year. Time is the friend of the dividend growth investor.