Our domestic stock
selection strategy has always favored dividend-paying companies and especially
those that are growing their dividends.
This is grounded in the knowledge that dividend income has historically
constituted around 40% of the total return from stock investing. It also reflects the conviction that dividend
growth is an important indicator of a growing business and management’s
confidence in the continued growth of that business.
The benefits of
this approach have been confirmed in a recent study by Ned Davis Research that
examined the returns of stocks in the S&P 500 over 15-year rolling periods
starting in 1972 and ending in 2014. The
study compared groups of stocks segregated monthly into one of four groups:
non-dividend payers; dividend cutters or eliminators; dividend payers with flat
dividends; and dividend growers or initiators.
Over every one of the 324 separate periods of 15 years in the study,
dividend growers or initiators were the best performing group, and dividend
payers with flat dividends were second best.
The dividend cutters and non-dividend payers were the weakest performers
over every 15-year period! Furthermore,
these last two groups not only underperformed the first two groups, but they
were far riskier (more volatile) while doing so.
While it is
reassuring that a dividend-paying stock strategy pays off in the long run with
more return and less risk, there are shorter periods of time when it does
not. The times when the dividend strategy
does not work as well tend to occur when
investors’ appetite for risk is high.
As you can see in
the graph (below), the late 1990’s tech boom was such a period as non-dividend
payers sharply outperformed dividend payers. You can also see that this surge
by the non-dividend payers ended very badly a few years later.
The second graph
(below) shows that a less extreme version of this pattern of temporary
underperformance of dividend payers has occurred over the last two years.
The recent performance of domestic stocks in
your portfolio has reflected this divergence from the long-term reward of
investing in dividend payers. We do not
know how long this anomaly will last, but we do have confidence that sticking
to our discipline of favoring companies with growing dividends will continue to
pay off for our clients in the long run.