"Do dividends matter? You bet."
Back in 2003, Robert D. Arnott wrote an article called "Dividends and the Three Dwarfs" in the Financial Analysts Journal. He studied stock market returns over 200 years and found something surprising—most of the money people make in stocks comes from dividends! The other parts of stock returns, like inflation, changes in stock prices, and small increases in dividends, played a much smaller role. Arnott called these smaller factors the "three dwarfs."
Now that it's 2025, let’s see if dividends are still as powerful or if the dwarfs have grown bigger.
Arnott showed that dividends matter more than anything else when it comes to making money from stocks. Here’s why:
Dividends Build Wealth Over Time:
When investors reinvest dividends (instead of spending them), they buy more shares, which earn even more dividends. Over time, this creates a snowball effect, making investments grow much faster.
The Three Dwarfs: Smaller Parts of Returns
Compounding Makes a Huge Difference: Patience does pay off
Investors are now paying more attention to companies that have stable, reliable dividend payments rather than those that offer high, but risky, dividend yields.
Since Arnott’s study, the stock market has gone through a lot—big crashes, low interest rates, and the rise of tech companies. But one thing hasn’t changed: dividend-paying stocks still perform well, especially in tough times.
Instead of paying dividends, some companies now buy back their own stock. This helps their stock price go up, but it doesn’t give steady cash to investors like dividends do.
Look for companies that have a strong history of paying and increasing dividends.
Recently, inflation has been rising. Since dividends give you cash, they help protect investors when prices go up.
Looking at U.S. stock returns over 200 years, we see that dividends are the biggest driver of long-term wealth:
Total Return on Stocks: 7.9% per year
Dividend Income Contribution: 5.0% per year (~64% of the total return)
Inflation Contribution: 1.4% per year (~18% of the total return)
Stock Valuation Changes: 0.6% per year (~8% of the total return)
Real Dividend Growth: 0.8% per year (~10% of the total return)
This data shows how powerful reinvesting dividends can be. For example, if someone invested $100 in 1802 and reinvested their dividends, their investment would have grown to $459 million by 2002!
Arnott’s study reminds us that dividends are the real stars of investing. Even though the stock market changes, companies that pay and grow their dividends tend to be the best long-term investments. So, while inflation and stock prices play a role, dividends still lead the way in creating wealth.
For investors looking to put these principles into action, SciVest offers strategies like the Growth of Dividend Income Strategy, which focuses on companies that consistently increase their dividends, and the Low-Vol Dividend Income Strategy, which prioritizes high-yield, low-volatility stocks. These approaches align closely with Arnott’s findings and can help investors build a steady, reliable income stream from their portfolios.
For a deeper, more technical dive into these concepts, consider reading John's advanced article on Revisiting Arnott's "Dividends and the Three Dwarfs"