Sunday, July 27, 2008

Do Dividend Paying Stocks Really Underperform The Market?

I recently ran across an interesting article on Charles Schwab's (SCHW) Market Insights page titled, Dividends: Myths and Realities. The conclusion of the article noted:

"...contrary to conventional wisdom, our research finds that dividend yielding stocks as a group have underperformed the market during recent years..."
The article goes on to state:
"...the rules of the game have changed so much in recent (emphasis added) years that some of the most common strategies for picking dividend-paying stocks no longer appear to work very well."
The Schwab article is one example of why investors need to pay attention to the time period over which returns and research conclusions are based. In the Schwab strategy piece, the period being evaluated is from 1990-2008. Certainly, late in the 1990's, the technology run left many high quality dividend stocks trailing the S&P 500 Index. Then, the bursting of the real estate bubble in 2007 pulled down the financial sector and dividend paying stocks tend to be concentrated in financials. The Schwab article contained the below table that outlines the performance of dividend and non dividend paying stocks over this 1990 - 2008 time period.

(click on table for large image)

dividend paying versus non paying table 1990-2008
Although the above table does show dividend paying stocks under performing non-dividend paying stocks, the risk adjusted returns tell a different story. The level of return for each unit of risk for dividend payers is 1% (15.7%/15.7%). For the non-payers, the return for each unit of risk equals .73% (18.0%/24.6%). Lastly, and Schwab's article does highlight this, the dividend payers are less volatile than the non-payers and the payers exhibit strong outperformance in down markets.

What if one evaluates payers versus non-payers over a longer time period? Ned Davis Research recently published a chart showing just this going back to 1972. And yes, the payers do outperform the non-payers over a longer time period.

(click on chart for larger image)


The return differences result in dramatic differences in the absolute dollar growth of investment portfolios as well. The growth of a $100,000 portfolio invested in 1972 through September 2007 would equal:
  • Non-dividend paying stocks: $240,000
  • Dividend paying stocks: $3,223,000
  • Dividend growers and initiators: $4,059,000
In the end, when evaluating conclusions from research reports and the like, it is important to be aware of the time period being evaluated.

Source:

Dividends: Myths and Realities
Charles Schwab & Co.
By: Greg Forsythe, CFA
July 25, 2008
http://www.schwab.com/public/schwab/research_strategies/market_insight/investing_strategies/stocks/dividends_myths_and_realities.html

Dividend Paying Stocks: Why This Chart Says It All...
Investment U
By: Mark Skousen
November 14, 2007
http://www.investmentu.com/IUEL/2007/November/dividend-paying-stocks.html

This article was written by Disciplined Approach to Investing. You can email questions or comments to me by clicking here.

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