January 11, 2019
"Do you know the only thing that gives me pleasure?" once said John D. Rockefeller. "It's to see my dividends coming in."
And that was the under-reported story of 2018. While stock and bond prices fluctuated wildly, almost all the cash flows of the indexes we use in our core model rose. Of the 11 indexes in our core model, 9 of them increased their dividend or interest payments, one was flat, and one was down. The per-share average increase was 6.2%, bringing the average payout 32% higher than it was just five years ago.
We lead off 2019 with this stat not because it's good, but because it's important. If these numbers went down, they are still the numbers on which most people should focus. As an investor you want to think about your money as a business, and dial in on what that business pays you as the owner.
What about the prices of the securities - or the numbers you see quoted in the news? You may have seen the number that the S&P 500 was down 6% last year. That has been quoted a lot, and it's incorrect. It was down 4.23% when dividends are factored in. This was by far the worst price performance since 2008, and it was only the second down year of the S&P 500 since 2002. Slamming the door in a huff on the way out, December was the worst December for that index since 1931.
2018 was an unusual year, in that almost all the asset classes that we use declined in price when measured from January 1st. Only short-term Treasury bonds rose. Asset class prices demonstrated much volatility over the course of the year. From August 29th to December 31st, the small cap index dropped over 28%. With dividends included, real estate rose 17% from late February to early December, then proceeded to give up almost half that gain in the next four weeks. The calendar-year worst performer was a tie between emerging markets and developed nation international markets, both notching a loss of almost 16% (emerging markets gained 36% in the prior year as the top performer in 2017, but apparently did not enjoy the spotlight.)
Keep in mind that the beginning and ending dates of a measurement affect the result substantially. In our case, and in the industry in general, the calendar year serves as the most logical proxy. Also remember that returns, and returns after a rebalancing model is applied, are not the same. Rebalancing tends to buy shares cheaply and this can alter results significantly.
Here is some context: if you are not a buyer of securities, 2018 was one of the worst years in a long time. If you are a net buyer, you are now buying the same shares at a lower price, and those shares are producing more cash flow, which is cause for cheer.