What you do with dividends makes a world of difference

With this in mind, an investment approach should allow time to benefit from this flow of income.

But this basic idea is too often lost in the noise of the modern markets. As an industry, we over-complicate the discipline of investment.

Great is the temptation to tinker with portfolios. Frequently, short-term commercial forces make us worry about whether we are positioned where

we should be, right here, right now.

For example, are we running the ‘right’ type of funds or should we be long-short, long-only, multi-asset, currency hedged or a commodity bear?

Should we worry about the efficacy of US monetary policy or deflation in Europe?

To what extent should we worry about geopolitics in Russia, the Far East, the Middle East, or the bursting of China’s many bubbles?

Sometimes it pays to step back. Some of the richest entrepreneurs have built businesses up over many years, reinvesting returns into their enterprises time after time. The process takes patience and diligence. Why should fund management be any different?

As long-term investors, you should be deploying capital into the best businesses you can identify and letting them reinvest that money on your behalf.

This compounding of returns over many years – the snowball effect of rolling up profits – is the surest way to build up capital. And if you receive a healthy, growing and sustainable dividend to compensate for the risk, then so much the better.

The first decade of this millennium was a difficult period for most investors, and many wounded individuals may never return to equity markets.

Research from Cornerstone Macro in the US made the following observation: “Post the TMT (telecoms, media and technology) bubble, anything that ‘promised’ return was gobbled up by investors across asset classes.

“What you must remember is that the 2000s were the first decade since the 1930s where all of investors’ returns in equities came from dividends (i.e. the price return for the S&P 500 was negative).”

The same phenomenon was observed in the UK. In that 10-year period, the value of the FTSE All-Share index fell 14.8 per cent, but a total return of 18.3 per cent reveals that more than 33 per cent was generated by dividend income from the constituent businesses and the reinvestment of this income into the shares.

It also pays to think about the context of this research, which argues for a multi-year phase of multiple expansions in the US stockmarket, driven by a low inflationary, low interest rate environment, and the benefits of the US being a net exporter of oil and gas.

This positive view of US equities promotes a strong dollar, vibrant domestic consumption, and a reversal of some of the forces of globalisation that have characterised the past 20 years.

Our job is not to predict the future nor is it to make macro bets.

More importantly, a focus on dividend flow, and the reinvestment of that dividend, has been proved to generate good total returns over the longer term.

There are fewer places to hide in choppier waters, but one just needs to adopt the mindset of a business investor, not a stockmarket speculator.

Carl Stick is manager of the Rathbone Income fund