Rain, Snow, and Total Return
By: Brian A. Magnan CFP®, AIF®, CEPA®
Director – Magnan Family Wealth Management
Our office is located in the western suburbs of Chicago, where the weather can change quickly. Today started with rain in the morning, turned into a snowstorm at lunch, and finished with a beautiful sunset in the evening. (In case you’re wondering, we don’t live here for the weather—but I digress.)
Watching the rain turn to snow reminded me of an investing concept: dividends and appreciation.
At their core, rain and snow are simply two forms of the same thing—water.
Rain or Snow → it’s all water
Some investors believe that if they want income, they must only invest in companies that pay dividends. However, many great companies have never paid dividends. One of the most famous examples is Berkshire Hathaway, led by Warren Buffett. Berkshire has never paid a dividend, yet it has delivered an average annual return of greater than 18% starting from 3/17/1980. Investors who excluded non-dividend-paying companies would have completely missed this opportunity.
On the other hand, some investors assume that dividend-paying companies don’t provide enough growth and avoid them altogether. But if we look at the S&P 500, dividends have historically contributed significantly to the market’s total return over long periods through the paying, reinvesting, and compounding of those dividends. Without dividends, a $10,000 Investment into the Vanguard 500 Index Fund on 8/31/1976 would have grown to more than $400,000. However, if those dividends were reinvested, the same $10,000 would have grown to over $2.2 million! Ignoring dividends means ignoring one of the most powerful drivers of long-term wealth creation.
Dividends can also be tax efficient. Qualified dividends are generally taxed at a similar favorable rate to long-term capital gains.
In the end, successful portfolios rarely rely on just one source of return. Just as both rain and snow ultimately provide water, both dividends and appreciation play a role in building wealth.
The next time you’re in Chicago and the weather switches from rain to snow on the same day, it might be a good reminder that portfolios work the same way. Returns can arrive in different forms—but they all contribute to the same outcome.
Dividends are not guaranteed and are subject to change or elimination.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Director – Magnan Family Wealth Management
Our office is located in the western suburbs of Chicago, where the weather can change quickly. Today started with rain in the morning, turned into a snowstorm at lunch, and finished with a beautiful sunset in the evening. (In case you’re wondering, we don’t live here for the weather—but I digress.)
Watching the rain turn to snow reminded me of an investing concept: dividends and appreciation.
At their core, rain and snow are simply two forms of the same thing—water.
In investing, dividends and appreciation are similar. They are two different ways investors receive total return.
Rain or Snow → it’s all water
Dividends or Appreciation → it’s all return
Some investors believe that if they want income, they must only invest in companies that pay dividends. However, many great companies have never paid dividends. One of the most famous examples is Berkshire Hathaway, led by Warren Buffett. Berkshire has never paid a dividend, yet it has delivered an average annual return of greater than 18% starting from 3/17/1980. Investors who excluded non-dividend-paying companies would have completely missed this opportunity.
On the other hand, some investors assume that dividend-paying companies don’t provide enough growth and avoid them altogether. But if we look at the S&P 500, dividends have historically contributed significantly to the market’s total return over long periods through the paying, reinvesting, and compounding of those dividends. Without dividends, a $10,000 Investment into the Vanguard 500 Index Fund on 8/31/1976 would have grown to more than $400,000. However, if those dividends were reinvested, the same $10,000 would have grown to over $2.2 million! Ignoring dividends means ignoring one of the most powerful drivers of long-term wealth creation.
Dividends can also be tax efficient. Qualified dividends are generally taxed at a similar favorable rate to long-term capital gains.
In the end, successful portfolios rarely rely on just one source of return. Just as both rain and snow ultimately provide water, both dividends and appreciation play a role in building wealth.
The next time you’re in Chicago and the weather switches from rain to snow on the same day, it might be a good reminder that portfolios work the same way. Returns can arrive in different forms—but they all contribute to the same outcome.
S&P 500 Index is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies.
Dividends are not guaranteed and are subject to change or elimination.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.