Trader Talk

O'Leary's new ETF and why dividends still matter

Kevin O'Leary
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My friend Kevin O'Leary, he of Shark Tank fame, recently got into the ETF business with the O'Shares Quality Dividend ETF, which invests in quality stocks that pay dividends.

I wrote about it last week here: 'Shark' Kevin O'Leary jumps into ETF biz

O'Leary came on the NYSE floor Tuesday to ring the opening bell, and I've often heard it argued by active traders that the relatively paltry dividend yield of most stocks (the S&P currently has a yield of 2.1 percent) would argue for investing in growth stocks that can see prices ramp up.

In other words, traders want to bet on price appreciation, rather than gains from dividends.

That's a mistake. O'Leary is right; in the long run, bet on dividends.

I'm not saying this because I have a slavish devotion to dividends. I have a slavish devotion to the best investment methodology, and investing in dividends is one of the soundest investment ideologies around.

Here's a few simple stats to illustrate why investing in dividend payers is a smart idea.

In the last 10 years, according to Standard and Poor's, the S&P 500 has risen 67 percent. However, the TOTAL return, including dividends, is up 110 percent. In other words, you got 64 percent more with the S&P paying a dividend than you did if there was no dividend.

That is huge. That is the beauty of compound interest. And the longer the time goes on, the bigger the numbers get.

Instead of 10 years, let's go back 25 years. Since 1990, the S&P 500 has had an annualized return, excluding dividends, of 7.15%. Including the dividend, the return has been 9.46 percent. So dividends have added roughly 2.3 percent points to your return each year.

Thanks to the wonder of compounding interest, that 2.3 percentage points add up to significant returns.

Since 1990, the S&P 500 has risen 485 percent, excluding dividends.

Including dividends, the S&P has risen 908 percent.

Because of that 2.3 percent additional dividend, your returns holding the S&P 500 are 88 percent higher.

O'Leary isn't the first to the dividend ETF space. There are many other choices on hand. But if you're looking for sound long-term investment advice, dividend investing in general is a good place to start.