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Varying Dividend Policies And The Recovery From The Great Recession

by: Accelerating Dividends


In a recent article that I wrote that explained the benefits of dividends (see the article here) I found one of the graphs that I presented regarding the downside protection that dividend paying companies offer interesting and worth a little more investigation. I was particularly interested in seeing which types of stocks based on various dividend policies have recovered their losses since the Great Recession. I have expanded this analysis to further evaluate just how good the return has been for stocks based on various dividend policies given different time frames.


The following series of graphs are made available by RidgeWorth Investments, which obtained the data by Ned Davis Research. Each graph shows the growth of a $1,000 investment in S&P 500 stocks by their dividend policy. Dividends do not appear to have been reinvested. The dividend policies shown in the graphs include dividend growers and initiators, all dividend-paying stocks, dividend payers (no change), dividend cutters or eliminators, non-dividend paying stocks, and the S&P 500 Equal Weighted Total Return Index. The footnote at the end of the article provides a few more details regarding the graph and these policies. A particular focus will be to compare the dividend growers and initiators and the non-dividend paying stocks.


The following graph shows the impact on total return of the initial $1,000 invested on January 31, 1972. Dividend growers and initiators had the best return which reached 4585% on March 31, 2013, followed by all dividend stocks at 3375%, dividend payers (no change) at 1784%, the S&P 500 Equal Weighted Total Return Index at 1714%, non-dividend paying companies at 115% and dividend cutters and eliminators at -7%. This shows the influence that dividends can have in a portfolio when held over the long term. It is also highlights the importance of evaluating each company for their fundamentals to ensure that growth can be sustained into the future. Earnings and free cash flow are important factors to consider. When thinking about dividend growers and initiators we can think of McDonald's (NYSE:MCD), Proctor and Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), Chevron (NYSE:CVX) and many others. Some initiators could include Orchids Paper Products (NYSEMKT:TIS), Apple (NASDAQ:AAPL), and CA Inc (NASDAQ:CA) among others. Evaluating the fundamentals are obviously important to ensure that you do not include a dividend cutter or eliminator in your portfolio as this dividend policy were punished by investors as a result of those decisions. Will the same thing happen to Pitney Bowes (NYSE:PBI), Exelon Corp (NASDAQ:EXC), or Cliffs Natural Resources (NYSE:CLF)? These companies recently cut their dividend and only time will tell if how the returns will be for investors. Despite what this graph shows, it is obvious that each company that falls under these policies return the same equivalent.

Since January 31 1972


How were each of the dividend policies' returns affected due to the Great Recession and has each dividend policy regained the loses. The following table compares the growth of the initial investment at its highs as found on May 31, 2007, its lows as found on February 29, 2009 and the most recent data available on the graph following the Great Recession as found on March 31, 2013. Note that the high is reflected by the data in the graph that was available and may not represent the actual day of the high and low of the Great Recession. The proportional difference between the high and the low is presented as "Difference 2007-2009." Dividend growers and initiators lost 119% of the growth they experienced during the Great Recession. All dividend stocks lost 168%, which was still slightly better than the S&P 500 Equal Weighted Total Return Index, which lost 198%. The table further shows that dividend payers with no change (-232%) and dividend cutters or eliminators (-444%) fared better than non-dividend paying stocks, which decreased by 2750%. In other words, dividends helped to offset the capital appreciation losses.

What has happened since February 29, 2009 to the present? Have all these different policies recovered their losses? These results can be found in the column "Difference 2007 & 2013." If you had invested in dividend growers and initiators your portfolio would have fully recovered from the lows of February 29, 2009, and in fact will have gained an additional 12% from the highs of May 31, 2007. All dividend-paying stocks have eked out a 1% increase while all others have not yet fully recovered. Non-dividend paying stocks remain 28% below the highs of May 31, 2007. Also, dividend cutters or eliminators remain 103% below the highs of the same time. Although in recent weeks companies that pay dividends, in particular large-cap stocks and other income favorites like Realty Income (NYSE:O) have declined considerably, I would still feel confident that the dividend growers and initiators remain above the highs of May 31, 2007.

(click to enlarge)Recovery since Great Recession

Next, I want to look at how these different dividend policies have performed over various time periods.


The graph below looks at the return of these stocks over a 5-year period (March 31, 2008 to March 31, 2013). The graph shows that the dividend growers and initiators returned 25% over this 5-year period while non-dividend paying stocks returned only 1%. The worst performing group is the dividend cutters or eliminators who returned -48%. Here also we can see that non-dividend paying stocks have only returned 1%. It has been said many times that dividend-paying companies became popular due to low interest rates and low bond yields. Furthermore, given that non-dividend paying stocks returned 1% through capital appreciation means that generally there was a need for income and this may have pushed some investors into dividend stocks to gain more yield.

5 year period


The graph below looks at the return of these stocks over a 10-year period (March 31, 2003 to March 31, 2013). At this period of time, the technology bubble had just about ended and a recovery was beginning. Obviously through this time the market also experienced the Great Recession. During the 2000s, some analysts have called it the "Lost Decade" of stock market investing, suggesting that very little over the long term gained. This decade was not lost by the dividend growers and initiators, which returned 118%, followed by all dividend-paying stocks at 103%. Even in this case, non-dividend paying stocks still returned 50%.

10 year period


Lastly, I wanted to look at the returns for the last 25 years. However, with the table below, I wanted to explore how many years did the dividend growers and initiators have overall better returns than the non-dividend paying stocks. Each year begins and ends on March 31. The years in green indicate that the dividend growers and initiators had the overall better returns while the years in yellow indicate that the non-dividend paying stocks had the overall better returns. The dividend growers and initiators had the better overall return 19 out of 25 years.

25 year review


In the past few weeks, dividend-paying stocks have been hit hard since the Federal Reserve indicated that its bond-buying program would taper sooner rather than later. Investors appeared to sell-off their dividend-paying stocks. Was this a good move? Based on the graphs that I have shown here, I can't say that it is. Even in the last 25 years, dividend growth and initiator stocks have done well and over the course of several decades, have returned more than the other dividend policies explored here. During these decades, various market conditions were experienced. The key is to hold for the long term and so long as the fundamentals of the company remain strong, any apparent weakness in stock price could be considered a buying opportunity. I for one see the sell-off in dividend-paying stocks as an opportunity to increase my holdings in current positions and initiate new positions in companies that I have interests in.

This article should also highlight the point of investing in not just any dividend-paying stock. Investors may want to build a core around dividend growers and initiators because this type of dividend policy has lost less during the Great Recession and has fully recovered the losses from that period also. Dividend growers and initiators have continued to gain momentum during the recovery and have been able to exceed the high of May 31, 2007. This is in contrast to most other dividend policies, which have still not recovered all the losses.

For new investors or investors who are seeking consistent income, dividend growers and initiators should be of particular interest. Unless you have a knack of finding the next "big one," returns based on capital appreciation alone appear to provide less income over time than most of the different dividend policies. This further highlights how dividends are an excellent source of income and could continue to provide solid returns in one's portfolio.


Each stock's dividend policy is determined by its indicated annual dividend. A stock is classified as a dividend-paying stock if the company indicates that it is going to be paying a dividend within the year. A stock is classified as a nonpayer if the stock's indicated annual dividend is zero. Dividend Growers and Initiators include stocks that increased their dividend anytime in the last 12 months. No-Change stocks are those that maintained their existing indicated annual dividend for the last 12 months. Dividend Cutters and Eliminators are companies that have lowered or eliminated their dividend anytime in the last 12 months. S&P 500 Geometric Equal-Weighted Index Total Return is calculated using monthly equal-weighted geometric averages of the total returns of all dividend-paying (or non-paying) stocks. A stock's return is only included during the period it is a component of the S&P 500 index. The dividend figure used to categorize the stock is the company's indicated annual dividend, which may be different from the actual dividends paid in a particular month.

Disclosure: I am long MCD, JNJ, O, CVX, TIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.