Dividends Pay Dividends

When something is extraordinarily good, we like to say that it "pays dividends." For example, we might say a college education "pays dividends" or a baseball team's trade for a star pitcher can "pay dividends."

Of course, some equities also pay dividends - and those dividends have a tremendous impact on the total return of an investment. Likewise, convertible bonds that trade like equities pay interest income - and that income can have an impact on total return that is similar to the impact of dividends.

All of the investments Cutler Capital specializes in have one thing in common - they all produce interest income or dividends. In fact, one of the important factors we consider in determining whether to invest in a security is the level of income or dividend it pays.

We're interested in interest and dividend income because of the impact they have on long-term total returns. During the past 30 years, dividends and the capital gains on those reinvested dividends have accounted for nearly two thirds of the total return of the S&P 500.

View Chart 1: Contribution To Total Return.

To fully appreciate the importance of dividends and the impact of reinvesting those dividends, consider the performance of $10,000 invested in the S&P 500 at the end of 1972.

View Chart 2: Effects of Compounding Dividends.

While these charts are limited to traditional equities, the impact of interest and dividend income, and the reinvestment of that income, can be even more dramatic for investments in convertibles and REITs, since the interest income or dividends are typically higher. Clearly, investing in securities that pay income or dividends "pays dividends."