Wednesday, July 20, 2011

Dividend investing during bull markets

Continuing on my series of posts around dividend investing here is another one.

With the recent slowdown in economy starting 2008, interest rates started falling short term borrowing interest rates have been near the 0% mark. Average certificates of deposit rates in the US have slumped, with current 1 year CD yielding around 0.9% average annually (according to . During these times investors look for more return to their money and start investing in dividend yielding stocks. Capital /principal and steady dividend yielding is what investors look for during this time.

The purpose of this post is to check if dividend investing make sense when the interest rates are higher , the economy is doing well and CDs yield more.

Let us start with an example of the recent past. According to this source for this historical CD data Between 2003 to 2007 average one year CDs yielded anywhere between 2.0 to 5.4% annually respectively falling to 3.9%, the average being 4.0% . A CD return is one of the safest investments where the principal is guaranteed not to change.

During the same time let see the yield if a hypothetical investor had put money in the total stock market fund like VTI.

VTI started 2003 with a share price around 42 and finished around the same price by the end of 2008. During this time it gave dividends of 69 c in 2003 to a max of $1.15.
The yield on the above is anywhere from 1.6% to little over 3% and surely not beating the yield of CD. The capital / principal increase was almost negligible for this period.

The reason I selected VTI was to select one of the most stable or non risky investments in the stock market compared to the CD. I did not bring dividend re-investing or compounding interest in my calculations.Yes, one could argue that they could beat the market with another selection of stocks.

I did not compare selection during earlier bull markets however.

What are your thoughts? Are there more ways of looking at these scenarios.