So, here's what we think about dividend investing. Here's the very first thing: when it comes to investing, we like to focus on both components of return. The income component is a singular component. There's another component of return, that's capital appreciation. I buy something today, and it's worth something tomorrow. When you only focus on income, when you only focus on yield, when you only focus on dividends, you're kind of saying, "Okay, I'm going to put out of sight out of mind the thought of appreciation." Well, you're getting rid of half, and oftentimes more than half of the equation. So we think, just like factor investing, dividend investing is often too singularly focused, where the outcome that you hope to achieve would be more easily attainable were you not so laser-focused.
Also, and this is coming from my public accounting background, I know how inefficient dividends are from a tax standpoint. Because realize, I don't know if a lot of people realize this because we just take it for granted, is dividends first have to go through the corporate taxation system. Meaning, the companies that are paying you the dividends, they're going to pay the payments they give you as a dividend after they've already paid income tax on it. It's not like they got a deduction for giving you this dividend. And then, you as the individual, when you receive the dividend, you will also then pay income tax on that money that comes in, assuming it's in an after-tax account. Now look, the government's tried to mitigate this a little bit because the corporate tax rates have come down with the legislation back in 2018. You know, the 2018 tax reform. We also have seen historically that dividends are taxed at a lower rate, and we all think that that's great, and it's once again another benefit to the investor class. But really, I think it's a matter of trying to lower the bar of the double taxation that's occurring when companies are paying taxes on the distribution, and then the individual is paying taxes when they receive it in their taxable accounts. This is not tax-efficient, not tax-efficient at all.
Another thing we talked a lot about this in pre-show prep, Brian, is that companies that pay dividends are, in essence, making a decision about how they want to approach capital allocation, and they are deciding that this money could be better utilized going back out to shareholders than we, the company, keeping the dollars and reinvesting. And you had an interesting take on this and some interesting thoughts around, is that a good sign for a company or a bad sign for a company, or either or it could go either way?
Well, there are two things. If you were thinking of hanging up pictures on your wall of great innovators, great investors, I mean, two people you want to think about is like Warren Buffett. Warren Buffett does not like dividends. I'll just get going if you want to go look up the dividend history of Berkshire Hathaway, he does not like paying them. He does, I mean, does not. It's not part of it because I think Warren would say, "I am much better if you give me the money and let me allocate where that money goes. I'm going to be better than the government. I'm going to be better than you, the individual. I would rather keep this money for a purpose."
I looked around the room, and then I took it out of my pocket because I don't like to have it. But, I saw, and I started thinking about a company like Apple, and we all know the history of Apple. So, you know Apple was founded by the two Steves, yeah, Wozniak and Jobs. Then, Steve Jobs gets kind of run out, and I think it's so interesting that if you look at from 1987 to 1995, Apple paid a dividend. During that period of time, the stock actually went up 108.6 percent, or about 9.63 percent annually. Not too bad, but that doesn't sound great on an annualized basis, but we all know Apple was struggling. Yeah, so much so that they looked around and said, "Oh my goodness, we have gotten ourselves in a pickle here. Can we bring back the guy that kind of brought the magic?" You know, so they brought Steve Jobs back into the equation in 1997. And, I think it's so interesting that because they had to suspend the dividend in 1995 just because of the company, from a financial standpoint, just couldn't support it. But then, you did not see a dividend from 1995 all the way through 2012.
What I think is interesting is that, we all know sadly Steve Jobs left this Earth way too soon, he passed away in 2011. And what happened from that period of 1997 all the way through the Steve Jobs era of the late 2010s, and we have the iPod that has changed my life, changed your life because you're watching our content, we've got the iPhones that come on the scene, we've got, you know, uh, you know there are so many things, the Apple watches that we all of us nerds walk around with. And, a lot of those original ideas came through innovation. They came from somebody who said, "I want to keep this money because I want to throw it into research and development. I want to come into there's a better way for me to expand and grow this company than just issuing out a dividend." And that's why when you look at the annualized performance during the Steve Jobs era, you quickly see that it had a rise in appreciation, that's not a misstatement, or an annualized performance at close to 25 percent. That is very valuable in understanding. It is because I look at it as a sad statement when I saw that Apple was going to start reinstating the dividend after Steve Jobs passed away. I was like, "Man, that's kind of sad." Well, you see the same thing when Microsoft added it and others. It's because it means they are basically implying the company is so mature now that we have more cash than we know how to deploy to grow, to expand, to innovate. We're just going to give it back to the investors, which is great but it's also sad because it's just realizing that the company's in a different place now. And that's why you don't see companies like the Teslas and the others that are still in that innovation phase, they're keeping the money because the money is a resource. It's going to fund the next expansion phase. You actually said something also, it's another sort of problem or issue with dividend investing, is that it can be unreliable.
Imagine if you were someone who was investing in Apple because you wanted the dividend and you needed to count on that income. Then all of a sudden, the company changes policy and stops paying out or reduces the dividend. Now, you're thinking, "Oh man, where is my income going to come from? Where is my cash flow going to come from?" Just because a company is paying a dividend does not mean that the company will continue to pay or increase that dividend. It's not something that is set in stone. So, if you're banking your entire retirement on dividend income, you might be taking more of a risk than you recognize.
Another point you brought up is that it can lead to over-concentration. I can tell you that I have had many meetings with families where great grandma bought Coca-Cola or some great granddad was on the board of some new bank that started in the community and they started paying these huge dividends, and the whole family is just taking this cash every year, assuming that this will be their retirement. And then, you know the rest of the story. Right now, we're dealing with a banking volatility play, and so anybody who was excited about all the income or dividends or yield that they're getting from those type of perceived safe investments right now is feeling like the carpet was pulled out from underneath them. So, just be careful because that concentration, like all sins and all things, is something that can be a good thing, but too much concentration actually takes away from your overall health and success and actually can be a detriment to you. I feel like the same thing happens kind of with dividend investing to a degree.
When we think about it, you already mentioned there are these two components of return: the income component and the capital appreciation component. Because you may be singularly focused, there's a good chance that dividend stocks may not just outperform the overall market. If you look at dividend payers of the S&P 500 from 1973 to 2021, just those who pay dividends, they've annualized about 9.6 percent, which is a really solid rate of return. But if you look at just the overall S&P 500, just a broad market itself over that same time period, it annualized 11 percent. So, what does that tell you mathematically about what those non-dividend payers must have been doing from a performance standpoint? If 11 percent is the average, they must have been performing greater than 11 percent to bring the average up there. So, if you're only focused on dividend investing inside of your portfolio, you, as an investor, may be leaving a lot of return on the table that could help to sustain your long-term retirement portfolio.
I don't want people to miss this point because we're such optimists, but I feel like we sound negative on dividend investing. I'm not actually against dividend investing. It's no different than the same behavioral stuff when I talk about prepaying your low-interest mortgage early. It's a time and place type discussion. I think if you're a person who's quickly approaching retirement or even in that phase of retirement, yield is important because you are trying to create income and other things to cover your living expenses. What I get frustrated with is young folks who are in the "be wealthy" phase of their life or create wealth phase of their life, and they're focusing on something like dividends prematurely, and they're losing the plot in that aspect. That's what I want to draw a light with this discussion, which is that this, once again, is another tool that you will find very useful in the crafting of your entire asset allocation. But don't get so excited about this newfound thing or this new tool that you have everything feels like it needs to either be screwed in with a bit or hammered in if it's a nail. We find out there are a lot of different uses that you want to have access to, all within your investment toolbox.
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