Bloomberg Businessweek – The Confusion Over Stock Dividends
Yet treating stocks as income-generators comes with a cost. “Rather than viewing dividend stocks as a way to capture extra yield, in the past we have stressed that dividend stocks should simply be viewed as a slightly less risky form of stock investing,” Jim Bianco of Bianco Research wrote this week. “As such, we should expect dividend-paying stocks to outperform during bear markets and underperform during bull markets.” He points out that during the growling bear market of October 11, 2007, to March 6, 2009, dividend-paying stocks outperformed the S&P 500 Equal Weight Index, minus 35.74 percent on an annualized basis vs. minus 46.10 percent. But during the ensuing bull market of March 6, 2009, to May 2, 2011, dividend-paying stocks underperformed the S&P 500 Equal Weight Index, plus 44.38 percent vs. plus 56.64 percent. The long and short of this analysis: Dividend stocks seem to be taking on two bond-like characteristics: providing income and stabilizing a portfolio. They may not be long-term market-beaters, but you already know that trying to beat the market is a losing game.

Comment

With dividend payments at an all-time high and much of the Treasury yield curve effectively at zero, dividend-paying stocks have been in vogue as of late. Many investors are willing to reach out a bit further on the risk curve to capture this extra yield.

Rather than viewing dividend stocks as a way to capture extra yield, in the past we have stressed that dividend stocks should simply be viewed as a slightly less risky form of stock investing. As such, we should expect dividend-paying stocks to outperform during bear markets and underperform during bull markets.
By comparing the S&P Dividends Aristocrats Total Return Index and the S&P Equal Weight Total Return Index, we can see this is indeed the case. The S&P Dividends Aristocrats Index measures the performance of stocks in the S&P 500 that have consistently increased dividends for at least 25 consecutive years. The index is equally weighted, so we compare its total return to that of the S&P 500 Equal Weight Index.
During the bear market from October 11, 2007 to March 6, 2009, dividend-paying stocks outperformed the S&P 500 Equal Weight Index by 11.6%. On an annualized basis, dividend stocks returned -35.74% versus -46.10% for the S&P Equal Weight Index.

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During the bull market from March 6, 2009 to May 2, 2011, dividend-paying stocks underperformed the S&P 500 Equal Weight Index by 42.4%. On an annualized basis, dividend stocks returned 44.38% versus 56.64% for the S&P Equal Weight Index.

During the bear market from May 2, 2011 through October 3, 2011, dividend-paying stocks outperformed the S&P 500 Equal Weight Index by 9.40%. On an annualized basis, dividend stocks returned -28.22% versus -45.26% for the S&P Equal Weight Index.

During the latest bull market from October 3, 2011 through April 5, dividend-paying stocks underperformed the S&P 500 Equal Weight Index by 5.04%. On an annualized basis, dividend payers returned 59.96% versus an annualized return of 72.95% for the S&P 500 Equal Weight Index.

To be sure that these past few bull/bear markets were the rule and not the exception, we also compared total returns of these two indices on all days when the S&P Total Return Index was up versus all days when the S&P Total Return Index was down. With data going back to the beginning of 1990, dividend-paying stocks returned an average of 66 basis points per day on days the stock market was up. The S&P Equal Weight Index returned an average of 78 basis points per day on those same days. On days the stock market was down, dividend-paying stocks returned an average of -67 basis points per day. The S&P Equal Weight Index returned an average of -80 basis points per day.

Rather than being concerned with reaching for yield, the charts and data above suggest dividend stocks outperform during bear markets and underperform during bull markets. However, if investors are savvy enough to know which way the market was heading in general, why even bother distinguishing between dividend-paying stocks and non-dividend-paying stocks?

Source: Bianco Research

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.

5 Responses to “Dividend Paying Stocks”

  1. wally says:

    I think you are confusing two different concepts here. If you buy a divvy stock for the dividends, the fall in value in a bull market really does not concern you; it is only a factor for those who do buy-sell investing. That’s the whole point of buying the dividend payers…. you don’t know which way the market will turn so you simply avoid that whole game.
    The risk of a non-dividend stock is getting caught ‘out’ when you must sell for some reason. If you have invested for the dividend stream you are not depending on an eventual sale to return your profit.

  2. jaymaster says:

    Yeah, what Wally said.

    Some folks don’t look at divvy stocks as an alternative to non-divvy stocks. They look at them as steady income generators. So more apt comparisons would be as an alternative to bonds, CDs, rental properties, etc.

  3. VennData says:

    “… if investors are savvy enough to know which way the market was heading in general, why even bother distinguishing between dividend-paying stocks and non-dividend-paying stocks?”

    Since no one knows, what does it matter?

  4. blackjaquekerouac says:

    it matters because if you can find the “holy grail of growth” then you can build principle while being paid to “sit on it.” the technical term in the world of tech is called “scalability”…where you can take a seemingly small idea (“search engine technology”) and “scale it up to infinity” basically. that’s why i think the focus on natural gas, the cloud and solar tech are so important: all three can be “scaled to infinity”…provided you can exist at all given the ruthless pricing environment. for those that do of course “the growth rates are truly exponential.” DEEP POCKETS just to play in these spaces….but the rewards are truly spectacular as well. “free energy”…”internet security”…”positive cash flow for a home owner” just to name three.

  5. edcroft says:

    This is all rather presented to serve the author’s argument.

    If you actually multiply the returns of each of those charts to compare divi vs non divi stocks it comes out as follows:

    Dividend Aristocrats
    (1-.3574)*1.4438*(1-.2822)*1.5996 = 1.06

    S&P Stocks
    (1-.4610)*1.5664*(1-.4526)*1.7295 = .799

    i.e. You’ve lost 20% in S&P but gained 6% in Dividend Aristocrats.

    That back of an envelope illustration certainly seems to back up the research done by SocGen and others that shows that higher quality divi stocks have massively outperformed in the long sideways market since 2000.