• MarketBeat (WSJ Blog) – Here’s Why You Should Care about Dividends: ‘Bladder Theory’
    A particularly pesky commenter has been tagging some our recent flurry of dividend-focused posts with this question: “Why do people care about the dividend yield? Doesn’t Modigliani-Miller imply we shouldn’t care except for tax reasons? And for tax reasons, it seems no dividend is better since you can choose when to realize a capital gain, but not a dividend.”…The theory suggests investors should be agnostic as to how stocks generate return. For instance, if a stock yields 10% a year, 3% might be in dividends and 7% might be capital appreciation. But if the company, had not decided to pay that money out in dividends that that cash would still belong to the shareholder. It would just be sitting on the balance sheet of the company instead of in the shareholder’s pocket. That cash balance would be incorporated into the market’s view of the company’s prospects, likely raising the capital appreciation component of its total return over time. That’s the theory at least. But in practice there’s an emerging sense it’s not always a good thing for companies to be rolling in cash. Some argue it might be a good discipline for management to be forced to pay out dividends.
  • MarketBeat (WSJ Blog) – BofA Quant: Dividends Strongest Performing Theme This Year
    Savita Subramanian, quantitative strategist for Bank of America Merrill Lynch says that dividend-oriented strategies have delivered the most consistent returns in 2010, but dividends are still an unloved part of the market:

In 2010, dividend oriented strategies have offered the strongest and most consistent returns despite the “risk-on / risk-off” nature of the market, and dividend yield and dividend growth are strategy leaders in the year to date. However, our work suggests we’re still in the early stages of building interest, given that dividend yield still remains a somewhat underutilized investment theme. Fund manager holdings show that Utilities, Staples and Telecom Services – sectors with the most attractive yield – are the most hated sectors, and have been for quite some time.


The table below breaks down the performance of the S&P 500 stocks by dividend yield:

  • The top of the table shows the performance of the 135 stocks that do not have dividends
  • The middle of the table breaks down 365 stocks stocks that do have dividends by quintile (1 =73 lowest dividend yielding stocks, 5 = 73 highest dividend yielding stocks)
  • Since these measures are calculated on an equal weighted basis, the bottom of the table shows a proper benchmark, the S&P 500 equal weight index
  • April 23, 2010 was the S&P 500′s 2010 high (1217.28)

What we found is rather surprising:

  • Year-to-date, owning dividend yielding stocks versus non-dividend yielding stocks has not mattered.  The differences shown are not material. This stands at odds with the comments highlighted above.
  • Since the high of the year, however, higher dividend yielding stocks (quintiles 4 and 5) have materially outperformed the lower dividend yielding stocks (quintiles 1 to 3) and non-dividend stocks.
  • Similarly, from December 31, 2009 to April 23, 2010, lower dividend yielding stocks (quintiles 1 to 3) and non-dividend yielding stocks outperformed the higher dividend yielding stocks (quintiles 4 and 5).


When the market is rallying (through April 23), the more speculative non-dividend and lower dividend yielding stocks outperform the more conservative higher dividend yielding stocks.  When the market is moving sideways-to-lower (since April 23), higher dividend yielding stocks outperform.

This is not new and not unique to this environment.  Instead this is fairly typical market action.  It suggests the opinion that dividend yielding stocks present a unique opportunity is not supported by market returns.

Category: Dividends, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Do Dividends Matter? Maybe Not!”

  1. asad says:

    Interesting enough I just saw a presentation by Wisdom Tree regarding their Dividend ETF and how it has outperformed the market. While it’s true that MM says dividends do not matter we have to look at the actual performance of the companies, MM also assumes that managements always does the right thing. Dividend can be a great indicator of how well the company is doing, management can always paint a rosy picture of the future but once they start cutting their dividends then you know they are not doing as well as they are saying.

  2. You don’t buy dividends primarily for upside benefit, you buy them for downside protection. As yield drops when the stock is rallying the very people who bought for yield (value investors) will tend to leave those stocks as valuations go out of kilter (since many of them are also DRIPping they are getting less bang for their buck). On the other hand when a stock is dropping yield works to draw in big fund money seeking good cash flow. The higher the yield the more funds will flood in for the ‘free money’. That is how I understand it

  3. adding….that all serves to reduce volatility in the shares because the buys and sells revolve around yield and not generic price momentum

  4. Similarly, from December 31, 2009 to April 23, 2010, lower dividend yielding stocks (quintiles 1 to 3) and non-dividend yielding stocks outperformed the higher dividend yielding stocks (quintiles 4 and 5).

    More yapping….

    I’ll bet if you went back further six months you’ll find that those higher yielding stocks dropped less in the crisis so they would not need to snap back as sharply as the ones that had no value support.

  5. samac says:

    In principle the option to just sell the stock seems superior, but in practice…

    Basically every highly successful cash-flow positive company is on a path to become private, as it buys back its stock to the last share. Or more likely, the higher share price generated by the buy-back will be diluted by employee stock options, sub-optimal deals, or the conflicted interest of a management sponsored LBO.

    There is a good argument to retain the qualified dividend tax at equal the cap gains rates. It eliminates a tax distortion that feeds the Wall Street machine, while reducing returns to shareholders- over the longer term, dividend payers have outperformed, especially true on a risk adjusted basis (even if you measure risk by volatility alone).

    Dividends are the one form of shareholder remuneration that does not involve hefty fees to the Wall Street machine- smallish fees for share buy-backs and then huge fees for M&A or buy-outs.

    There will be few tears shed by the bankers if the lower qualified dividend rate expires.

  6. as well, from one perspective, this, particular, ‘Topic’ is moot..until “Covered-Call”-Writing is countenanced..

    http://www.thefreedictionary.com/countenance see tr.v. ..

  7. quaternion says:

    Question: do the tabulated prices account for dividends and their reinvestment, or do they reflect only the price of the common?