Do Dividend Stocks Underperform the Market?

(I originally posted the following article on The DIV-Net website on July 27, 2008)

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.

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.

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

Dividend Paying Stocks: Why This Chart Says It All...
Investment U
By: Mark Skousen
November 14, 2007

Comments

[barnburner:]

I suppose one could "cherry pick" a time period that proved what ever one wanted to prove. The relevance of the article has more to do with ones age, are you retired now?, are you retiring in 10 years, 30 years?-makes a big difference.

2008 Aug 04 10:21 AM

[Michael Zhuang:]

There is a reason why Charles Schwab is a discount broker.

2008 Aug 04 10:40 AM

[huangjin:]

An accurate comparison would be between low yield and high yield stocks of the same sector and with similar market cap.

2008 Aug 04 12:28 PM

[bluskye:]

Does anyone have direct experience with Jack J. O'Malley, author of "The New Dogs of the Dow"? The Dogs of the Dow has been underperforming for the last decade, and the focus of it is buying the 10 highest dividend yielding stocks in the dow. Selling some of the gains from the best performing Dow stocks to add to the ones like GM would sure be an example of selling some high and buying some low. IF GM survives. Any thoughts?

2008 Aug 04 01:33 PM

[Alex Filonov:]

18 years period or 35 years period? Who cares! In the log term we are all dead. If you buy Dogs of the Dow today, you buy GM and Ford. That's way too risky. Every stock should be researched on its own merits, dividend is just one of the variables. And if you don't have time to research individual stocks, invest in mutual funds or ETFs. Even then research is needed. Of course, there are also index funds, but if you invested in such in 2000, you did worse than with CD (which, by the way, is FDIC insured and your principal is definitely safe).

2008 Aug 04 02:28 PM

[Gob:]

"the rules of the game have changed so much"

Yes. Just like they'd changed during the tech bubble.

Or so some thought.

2008 Aug 04 04:09 PM

[bbzz24:]

my 'research' shows that stocks suck. it was concluded over the 1928-33 period.

2008 Aug 04 05:01 PM

[truthinvesting:]

My portfolio which is documented on my free website shows that dividend paying stocks have OUTPERFORMED PROVIDED you buy the right ones at the RIGHT PRICES. UST KFT MO KO RAI PFE BUD have all been bought in my"bargain bins" and done well. What you are looking for is GROWTH and SAFETY as well as dividend

2008 Aug 04 06:13 PM

[Capitalist Cow:]

It seems like the key is to buying dividend paying stocks because they "keep you in the game". But at the same time don't buy dividend paying stocks which have a large yield becasue of a fundamentally depressed stock (GM, C, BCS,)

2008 Aug 05 12:27 AM

[mangum:]

It makes perfect sense that Schwab would diss dividend paying stocks. Investors tend to trade in and out of these infrequently, which lowers a brokerage's commission revenue.

2008 Aug 13 01:10 PM

[mangum:]

Of course Schwab is going to diss dividend stocks. People tend to buy and hold them, which means "lost" commission revenue for Schwab. Completely self-serving on Schwab's part.

And isn't it interesting that one can "lose" something one never had?

2008 Aug 13 01:12 PM

[Rhunzzz:]

So there are seasons in stock investing too. Dividends go in and out of favour, and it depends which time period you're looking at. Thus, perhaps it's best at the end of the day to simply buy the entire market at the lowest possible cost, and look at total return.

Jun 02 05:46 AM