Dividends are an obvious source of return. Dividends can also drive returns.
Ned Davis Research analyzed S&P 500 stocks covering the years 1972 through 2016. The companies were partitioned into two groups – dividend payers and dividend non-payers – based on the company’s dividend policy over the previous 12 months.
Ned Davis Research further partitioned the “dividend payers” into three sub-groups based on their previous 12 months of dividends. They were partitioned into dividend growers (and initiators), no-change dividend payers, and dividend cutters and eliminators.
The companies remained in their respective partitions for the next 12 months or until a change in dividend policy. Ned Davis Research then compared the wealth outcomes from the different groups.
Spoiler alert: Dividends won hands down.
Investing $100 in the dividend-growth members of the S&P 500 would have produced an ending value of $6,973. Dividend payers – a mixture of dividend growers and constant payers – would have produced the next best ending wealth at $5,015.
The dividend non-payers and the dividend cutters and eliminators populated the rear.
Had you invested $100 in companies that never paid a dividend, your $100 would have grown to only $289 over 44 years. Had you been so unfortunate to invest only in the dividend cutters and eliminators, you would have done better storing your $100 in a coffee can. The dividend cutters and eliminators turned $100 into $82 over 44 years.
Dividends offer more return. They offer more return with lower volatility.
Ned Davis Research goes on to tell us that dividend growers and payers are less volatile than dividend non-payers and eliminators. The latter group experienced eight percentage points more volatility than the former.
If raising portfolio returns and lowering portfolio volatility is a priority, dividend stocks offer a strategy. I offer additional, corroborating research to buttress the strategy.
“What Difference Do Dividends Make?” is an article offering the corroborating research. The article was featured in the November/December 2016 issue of the Financial Analysts Journal.
I’ll cut to the chase. Dividends make a significant difference, and all for the positive.
The authors of the article 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.
As for volatility, the authors found that dividend payers significantly reduced portfolio volatility. Volatility was reduced independent of investment style.
The authors go on to tell us that dividends 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.
Au contraire. The authors found that dividend-paying growth stocks still produce higher returns over time.
Benjamin Graham, the father of fundamental-investment analysis, and his co-author David Dodd, presented the first convincing argument for dividends. They presented the argument 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’ve been investing for 30 years, so I’m well-versed in the research that supports dividend-stock investing. That’s why I’m a dividend investor first. I hope I provided sufficient evidence for following my lead.