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This is the last part of my series on simple dividend strategies, and it continues with more interesting highlights from the U.K. research study discussed in Part 3. This comprehensive study not only confirmed that dividend stocks outperformed the overall market indices, it also analyzed subgroups of dividend growth stocks and found that certain characteristics made a significant difference in compound annual average return. By applying these filters to consistent dividend growth stocks (e.g. Dividend Aristocrats, Champions, and Challengers), investors can potentially increase their total return even more than by just buying a random group from this universe.

Consistency Led to Higher Returns
The U.K. study split the market into subgroups based on number of years of consistent dividend growth (Exhibit #6). The results support what dividend investors in this forum already subscribe to, dividend-paying stocks outperformed non-payers by an enormous margin. Non-payers underperformed by over 430 basis points for the 20-year period and had higher volatility than each of the dividend-paying subgroups. Furthermore, stocks with 10+ years of consistent dividend growth provided the highest absolute and risk-adjusted returns of all subgroups. The Takeaway: Choose stocks with 10+ years of consistent dividend growth (Dividend Aristocrats, Champions, and Challengers).

Size Matters!
Smaller Dividend Growth Firms Delivered Higher Returns & Lower Volatility
The table above highlights selected results from Exhibit #4 of the U.K. study, focusing on compound annual rate of return, standard deviation of annualized returns (volatility), and reward/risk ratio (Sharpe) for the universe of stocks with 10+ years of consistent dividend growth ranked by size. The quartile portfolios were equally weighted. As we might expect, smaller firms yielded more growth and produced a higher total return. I found it interesting that this was accomplished with lower volatility than the larger-size quartiles and a higher dividend yield, though the dividend growth rate was lower.
The lowest quartile also had the smallest maximum drawdown (29.36%) versus the highest quartile, which had the largest maximum drawdown (44.27%). Looking at the Sharpe ratios, there was a clear advantage to choosing consistent dividend growth stocks in the first two quartiles (smaller-cap firms). It is worth noting that the U.K. consistent dividend growth universe (10+ years) was heavily skewed in favor of large-cap firms (Exhibit #3). In the U.K. study, 33% of these stocks ranked in the top 10% of all firms by market cap, and 74% were in the top 30%. Only 8% were smaller than the overall median market cap. The Takeaway: To maximize returns, it may pay to avoid the larger-cap (top quartile) consistent dividend growth stocks, in favor of smaller-cap firms.

Seek High Dividend Growth Rates, but Not the Highest
The study proceeded to divide the 10+ years of consistent dividend growth stocks universe into quartiles based on 1-year and 5-year dividend growth rates (Exhibit #8). It found that the quartile with the highest growth rate performed the worst in both cases. This is consistent with investors overpaying for the fastest-growing businesses. Excluding this quartile, the other subgroups showed increasing absolute and risk-adjusted returns as the historical growth rate increased. The Takeaway: To improve returns, look for high dividend growth, but not the highest (quartile).


Low Yielders Had Lower Returns
Finally, the study divided the 10+ years of growth dividend stocks into quartiles based on yield (Exhibit #9). The results found a positive relationship between yield and returns, on both an absolute and a risk-adjusted basis. Also, the lowest quartile (lowest yields) underperformed the other quartiles by around 400 basis points on average. There may be a small-firm effect present, as the previous chart based on size showed that on average, smaller firms had higher dividend yields. However, compared to the overall market, 74% of this universe is in the top 30% of all market caps, so most of the stocks are relatively large. Perhaps this supports the argument that higher dividend payouts signal strength and prevent management from spending cash on fruitless ventures. The Takeaway: To maximize returns, choose consistent dividend growth stocks with higher yields; avoid the lowest quartile.
This study analyzed the 10+ years of dividend growth universe using several different filters and identified actionable characteristics that may help investors to refine their dividend investment strategy, to maximize their returns, and to reduce volatility. The extent to which these characteristics can be combined may require more study. There were strong relationships between yield and firm size, and this may carryover to the results based on dividend growth. However, when the researchers analyzed performance based on a price-dividend-growth ratio (a variation of PEG) the results were mixed. Lower PDG ratios generally yielded higher returns on an absolute basis, but the relationship did not hold on a risk-adjusted basis (Sharpe ratio); see Exhibit #10 in the study. While combining the filters may yield even better results, perhaps it is unnecessary. Based on the study results, applying any one of these strategies to an equally-weighted portfolio of 10+ year dividend growth stocks yielded returns that were around 50 to 200 basis points higher than an equally-weighted random sample of 10+ year dividend stocks (15.48%), and all of these strategies beat the index benchmarks, regardless of weighting.
Next Steps
While this is the end of my series on simple dividend strategies, I plan to create some model portfolios using the Dividend Champions and Challengers lists and this research. I will publish the criteria and the stock lists, and then track the results against the S&P and the Dividend Aristocrat portfolio that I created in Part 1 of this series. If the lists contain over 30 stocks, I may take a sample to make it reasonable for investors to implement, while still achieving the benefits of a diversified portfolio. If you feel strongly about any one of the strategies mentioned here, or some combination, please post your feedback. If anyone has tried using one of these subgroup strategies, I would be interested in your results too. I hope this series has been helpful to the SA community. If you found value in these articles, please recommend them and share the links with others. I have enjoyed writing them and discussing the ideas with the community!
  • I am long: KMB, MO, COP, AFL, CB, INTC, and T. I may initiate positions in some of the stocks mentioned in my Simple Dividend Strategy model portfolio (SDS-30) in the next 72 hours.

  • I’m not affiliated with any of the research authors.

  • I haven’t found a similar study on U.S. markets, but if anyone finds one, I would be very interested in the seeing the results.

Owain ap Gwilym, Andrew D Clare, James Seaton, Stephen H Thomas. (Winter 2009). Consistent Dividend Growth Investment Strategies. The Journal of Wealth Management, Vol. 12, No. 3: pp. 113-124. Working Paper version retrieved from:

Source: Simple Dividend Strategy, Part 4: Filters For Increasing Your Dividend Growth Strategy Returns