RODNEY HOBSON IT’S funny how myths perpetuate themselves. During the last few turbulent months many investors have abandoned equities and switched into gold as if the stock market was a casino and the precious metal a safe haven. The opposite is much nearer the truth. There are two major reasons for investing: to produce income and to store wealth for some time in the future. Shares in companies paying solid, progressive dividends fit the bill on both counts. Gold does not. It is very important to recognise the remarkable power of dividends. Newspapers feed the public with daily doses of how share prices rise and fall, often commenting on how billions of pounds have been added to or wiped off the stock market, or how shares in some company or another have gained or lost millions in a single day because of one item of good or bad news.
It is easy to be seduced by these dazzling but incomprehensible figures that foster the notion that the stock market is all about making a fast buck in a gambler’s paradise – especially in a bull market when all eyes are on rising share prices. Similarly, if share prices plummet, the private investor is scared away, just at the time when the best bargains are becoming available. In fact, the real money is made through solid investments that pay regular, rising dividends. The greater part of total returns for share investors over time will come from dividends, not capital gains. In a bull market, the rise in share prices puts icing on the dividend cake. When markets are stagnant, dividends ensure that you still make money from equities. And when markets are falling, dividends offer you compensation to tide you over until the good times roll again. To demonstrate the importance of dividends we can look at figures produced by the Barclays Equity Gilts Study, which shows that £1,000 invested in shares at the end of the Second World War would now be worth nearly £60,000, a pretty decent return in itself. However, had we reinvested the dividends our pot would have ballooned to about £1m. Over a shorter time period, we have seen the emergence of the first Isa millionaires, people who have year by year invested their annual Isa entitlements and rolled up the dividends. These have not been large investments – even today the annual total allowed is only £10,680 – yet they have built up in the safe haven of the stock market. There are many solid companies offering attractive yields of more than 4 per cent and even up to 7 per cent. They include National Grid, United Utilities, Royal Dutch Shell, GlaxoSmithKline, Sainsbury and Vodafone. I own shares in all of them. The key is to have 10-12 companies from different sectors in your portfolio so that if one hits a bad run the others can compensate. Gold, in contrast, offers no dividend, so you are entirely dependent on more buyers coming in to drive up the price. It is easy to forget that the surge in gold has come since the millennium. For 20 years before that, the price drifted lower. When the bubble bursts, those buying now will find the effect rather painful. Rodney Hobson is a financial author and journalist. His latest book, The Dividend Investor, is published by Harriman House.