Buffett has said Berkshire Hathaway (NYSE: BRK.b) has no plans to pay a dividend. Berkshire’s stock portfolio, in contrast, is dominated by dividend payers. The dividend-paying stocks have dominated Berkshire’s portfolio for decades.
You love dividends, I love dividends, Buffett loves dividends. I don’t believe any of us pursue unrequited love. So, whenever I find a reason to cement our emotions to logic, I pass it along.
I’ve found another reason. It’s one many dividend-stock investors overlook. (Buffett is unlikely one of them.)
I have access to data unavailable to most individual investors. It’s one advantage of being a CFA (Chartered Financial Analyst) charter holder.
I’ll concede that much of the data is of little use to individual investors. Enough is useful, though. It’s useful for no other reason than it girdles what we believe. It girdles our resolve to adhere to a proven strategy. In our case, the strategy is dividend-stock investing.
The November/December 2016 issue of the Financial Analysts Journal featured such a girdling article. “What Difference Do Dividends Make?” was the article. The article was written by C. Mitchell Conover, CFA, CIPM, Gerald R. Jensen, CFA, and Marc W. Simpson, CFA.
I’ll cut to the chase. Dividends make a significant difference. The good news is that the difference is all for the positive.
Conover et al. evaluated dividend-paying stocks through the years. They identified two major findings.
One is that high-dividend-paying stocks are the least risky. The authors found that an average yield of 4.3% or higher offered the least risk. They’re also found that these stocks generate higher returns. These stocks returned 1.5% more annually than non-dividend payers.
What’s more, dividend-paying stocks significantly reduce portfolio risk. The risk is reduced independent of investment style.
The other major finding centered on style. Dividends also benefit investors who own growth and small-cap stocks. These are the stocks of companies thought to benefit most from reinvesting earnings.
But what about high-growth, non-dividend-paying stocks? Companies like Amazon.com (NASDAQ: AMZN), Facebook (NASDAQ: FB), and Alphabet (NASDAQ: GOOGL) must be the exception? Surely, these companies should reinvest all earnings.
Conover et al.’s research suggests otherwise. They found that dividend-paying stocks in the category still produce higher returns over time.
Conover et al. also found that growth investors targeting average-size or below-average-size companies benefit. Investors could have quadrupled returns by investing in dividend-paying alternatives.
I’ve always assumed what Conover et al. presented was true. I base my assumption on research by the founding father of value investing. Benjamin Graham, and his co-author David Dodd, presented the first convincing argument for dividends. The argument features in their classic text Security Analysis written in 1934.
Graham and Dodd argued that investors should prefer a sure dividend to the risk of allowing the company to reinvest it. They present good reasons. Dividends generate reliable returns, buffer capital losses, and reduce portfolio volatility. Dividends also lower the risk of overpaying.
I’m well-versed in arguments that support dividend-stock investing. I’m sure Buffett is equally, if not better, versed.
That said, I’m always invigorated when I encounter research and data that support my bias. “What Difference Do Dividends Make?” further supports my bias for, and our belief in, dividend-paying stocks.