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What were dividends like when saving interest rates were high?

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  • Jan 29th, 2016 1:16 pm
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Deal Addict
Sep 5, 2010
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382 upvotes
Toronto

What were dividends like when saving interest rates were high?

For investors looking to get the most out of their portfolio, I am curious to know what was the appeal of dividends when interest rates were high back in the day. For example, there was a time when banks paid up to 6% or more interest rate? If dividends have a yield of 4% , and even with capital gains, why bother with stocks and all their volatility, when you can simply put your money in the bank and earn 6% with no risks involved and full capital preservation.

Was dividend yield generally higher when interest rates higher? i.e does it keep up with interest rates? I don't see that to be the case at the moment, with these historical interest rates.

I tried to look up historical yield rates for some major companies and wasn't able to find data going back more than 10 years. For BCE for example, their yield about 10 years ago was close to 3.3% (today it is 4.67%) .

For TD, their yield was about 2.3% 17 years ago (1999)

RBC had the best yield actually, around 4.2% back in 2000


any thoughts for those who were doing trading 10 or 20 years ago or so?
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4 replies
Deal Addict
Apr 22, 2014
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Oshawa, ON
price down yields up.

TD's has ranged from 2.5ish to 5ish from 1985 onward. A tad higher for a short time during the 2008 crisis.
Deal Fanatic
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Dec 14, 2010
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3 considerations:

1. What was the inflation rate back then? A 6% interest might be meaningless if inflation is at the same rate or higher. You need to grow your income at a higher rate than inflation.

2. You shouldn't look for yield only. Dividend growth is more important than yield. The yield is simply a function compared the stock price at the time it was purchased. Yield in 2008 was higher than today or 10 years ago simply because the market crashed. One cannot predict that. But one can predict dividend growth based on estimated earnings, cash flow, market consensus and corporate guidance.

To your example, BCE yield 10 years ago was 4.38%: on Jan 31st, 2006, BCE was trading at $30.07 and paid dividend that year was $1.32. The dollar invested back then would have a yield of 6.2% today, because dividends have been growing at a cagr of 6.5%, providing an annualized total return of 8.1% (dividends reinvested). At end of 1996, TD was trading at $8.84, paying $0.28 in dividends, so a 3.16% yield. That initial dollar today yields 25.5%, because TD dividend cagr is 11.7%, returning 12.1% annualized with dividends reinvested. RBC best yield was in the beginning of 2009, trading at $19.9, with dividends at $1.18, it yielded 5.92%. Using your example in 2000, it was trading at $17.45, so with dividends at $0.46, yield was at 2.6%. Since RBC has a dividend cagr of 11.5% since 2000, that inital yield is now 11.9%, providing an annualized return of 9.2% with dividends reinvested.

The longer a company keeps growing its dividend, the longer it beats any fixed income investment in the long run.

3. You also should look at earnings yield, to estimate your total return. That allows you to directly compare the total return between these 2 types of distinct investments. A portfolio built with companies with higher earnings yield gives higher return in the long term, even if the initial yield is lower.

Lastly, when you invest in a company, you don't simply buy a stock, you buy part of their business. So don't let price volatility play any role in your decision. Equities are for long term, so it shouldn't be considered for the short term. To compare with interests that the bank pays, you need to assume that your money would be "locked" for at least 5 years, because one shouldn't invest in equities with a timeframe shorter than that.

Rod
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Oct 9, 2005
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In a taxable account, one should consider their marginal rate on other (including interest) income vs. dividends and capital gains as part of the value of earning a (pre-tax) $1 in interest vs. dividends/gains. Added complexity to the equation for whatever portion of capital gains are deferred to future years, as that could have a different tax rate.
Intricated
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Nov 24, 2013
6479 posts
3344 upvotes
Kingston, ON
Yield is a funny metric. Say you bought shares at $19 (split adjusted) of TD at that 2.3% yield in 1999 and have held them since then. The effective yield on those 1999 shares is now 10.7% ($2.04 current annual div/share over $19).

Yield at current price has only gone up to 4.xx%, but damn your benefit from it is huge.

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