The Dark Side of the Dividend Boom

But think how bad the total return on stocks would have been for that period without dividends. The dividend yield for those years, again according to Ibbotson, averaged 3.47%. Take away dividend payments (and the return investors got from reinvesting those dividends), and capital appreciation -- the increase or decrease in the price of stocks -- averaged just 1.42% a year.

When stocks pay out 5.37% in dividends, as they did in 1974 after and because of the market plunge that year (large company stocks fell 29.72%, Ibbotson says), some investors will decide to hold on rather than sell. And that dampens the market's fall.

This incentive wasn't in view in 2000 when such stocks as Intel(INTC Quote), Microsoft(MSFT Quote) and Cisco Systems(CSCO Quote) paid a grand total of zero, zip, nada in dividends. Capital appreciation was close to the only game in town. When stocks stopped going up, investors didn't see any reason to own them. Certainly, they weren't worth buying for their dividends.

In fact, I suspect that the lack of significant dividend yields on the stocks that make up the Nasdaq Composite is one reason it has taken so long to recover the ground it lost in the bursting of the bubble. Paltry dividends kept many value investors from buying these stocks -- and value investors play a critical role in the recovery of any heavily damaged stock price.

(The Nasdaq 100 Index, which includes the big-cap Nasdaq stocks, has fared even worse than the Composite index. It lost 83% of its value from its peak in March 2000 to its bottom in October 2002. Today, the index is at about 35% of its 2000 peak. The Composite's value is 44% of its 2000 high.)

The Return of Patient Investors

A decent dividend yield is the underappreciated foundation of long-term, buy-and-hold investing. You've all heard some version of this advice: No investor who has held on to stocks for 15 years has ever showed a loss for the period. And only two 10-year periods -- 1929 to 1938 and 1930 to 1939 (the years of the Great Depression) -- show a loss, according to Ibbotson data. Even then, the loss is relatively small: an annual 0.89% for 1929-1938 and an annual 0.05% for 1930-1939.