This one ought to whip up the dividend zealots. There was an article up at Seeking Alpha titled The Dumb Dividend Idea noting that "the concept of dividend-stock investing is almost worthless, on the face of it."
My general take on this issue has been not to put all your eggs into one strategy-basket. My preference is to have a portfolio comprised of holdings with all sorts of attributes. This makes for better diversification in my opinion by owning various investing themes including dividend characteristics, countries, themes and sectors. I view this approach as being moderate but the dividend zealots think I am wrong, or worse.
It was very surprising how few flaming comments there were on the post the last time I looked. My seemingly less inflammatory posts get lit up pretty good. Funny stuff.
The author, David Goldman, seems to be saying that the dividend zealots don't care about price appreciation and while I don't know if that is true, I have sifted through their comments over the last couple of years and capital appreciation seems to be low on the priority list (my interpretation - I'm sure they would say otherwise).
Dividends are crucial to long term investment success. Depending on the period looked at, dividends have accounted for 40-50% of total equity market returns. This makes a very simple argument for being cognizant of what your portfolio yields and the way I view things, makes the argument for trying to have the portfolio yield a little more than the S&P 500. I think collecting an extra 100 or 125 basis points in yield above the SPX will add meaningfully to a long term result both in nominal terms but also in risk-adjusted terms.
The building block here is that over long periods of time the stock market averages 9-10% annualized returns (we can debate whether 9-10% stands up anymore in another post). If 3% of that can come from dividends instead of 2%, then the rest of the portfolio doesn't have to take on as much volatility, unless you want it to.
The other big point made in the article was that during downturns, dividends don't offer a place to hide. I generally agree with that point. There are a lot of articles in MSM that allude to hiding in dividend stocks. From the recent July 8 peak the S&P 500 is down 14.06% and the SPDR S&P Dividend ETF (SDY) is down 11% so maybe that was a place to hide, maybe it was not. That would be a subjective decision. However, from the October 2007 peak to the March 2009 low, SDY clearly was not a place to hide as it dropped 54.24% versus 50.45% for the S&P 500 (actually this is through March 6, 2009, which was where the chart on Google Finance went to).
Dividends are far from worthless. Their role in a diversified portfolio is pretty clear but a properly diversified portfolio means having exposure to whatever is leading the market, or at least a better chance of that exposure, which I believe will lead to a better long term result.