Stock investors know that when it rains, it can pour. So when times are tough, they should also know that dividend-paying stock investments could provide an umbrella to help them ride out a storm — rather than flee in a panic.

In fact, ongoing market turbulence offers a powerful opportunity to remind investors that the unique characteristics of dividend-paying stocks could potentially help to improve portfolio returns during down markets. That’s because, historically, the payments provided by dividends have in part compensated for portfolio price declines. Investors should also note that dividends are widely considered an indication of an issuing company’s underlying strengths, and that companies are generally reluctant to cut dividends — even during down markets.

The chart below demonstrates the stabilizing effect of dividends during “down markets” from 1926 through 2009, and illustrates that dividend income has helped offset about a third of the market’s losses in down periods. As you can see, during “all markets” and during “up markets,” the average return from dividends was lower than the market’s average total return. But during “down markets,” dividend returns held steady — in positive territory — and could have helped to offset losses elsewhere in a stock portfolio. (The term “all markets” refers to every year during the time period. “Up markets” refers to calendar years in which the S&P 500 total return was positive. “Down markets” refers to calendar years in which the S&P 500 total return was negative.)

Dividends through the decades: a look at the numbers*

• Historically, dividends have been much more stable than price-only returns. Since 1926, the market’s annual return from dividends has ranged from 1.1% to 18.6%. In contrast, the market’s annual return from price changes has ranged from –47.1% (1931) to 46.6% (1933), with 27 negative return years.
• From 1926 through 2009, reinvested dividends have provided greater returns than price appreciation, as measured by total returns of the S&P 500.
• A $10,000 investment made in 1985 in the dividend-paying stocks of the S&P 500 would have grown to $245,650 by the end of 2009. By contrast, a $10,000 investment made in the non-dividend-paying stocks of the S&P 500 during the same time period would have grown to $182,880.
• From 1926 to 2007, almost 40% of the total return of the S&P 500 was from dividends.
• More than three-quarters of the companies in the S&P 500 paid a dividend in 2009.

Note: This is for illustrative purposes only and is not indicative of any investment.

*Source: Standard & Poor’s. Based on average annual total returns for 1926–2009. Stocks represented by the S&P 500 Index. Past performance is no guarantee of future results. Index returns include the reinvestment of all distributions. Returns do not reflect the deduction of fees or expenses or the impact of taxes or other expenses. It is not possible to invest directly in an index. All data and analysis is provided by Standard & Poor’s.

S&P 500® Index is an unmanaged index consisting of 500 stocks and is a widely recognized common measure of the performance of the overall U.S. stock market.

Past performance does not guarantee future results. Performance illustrated does not represent fund returns. There may be additional fees and expenses associated with investing in a mutual fund as described in the fund’s prospectus. For current fund performance, please visit www.northernfunds.com.

Mutual fund investing involves risk, including the potential loss of principal. Stocks are more volatile and carry more risk and return potential than other forms of investments.