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Research Into Dividend Outperformance

A recent article by Eddie Herring, "All I Want for Christmas is my Dividend," referenced some interesting research into the outperformance of dividend paying companies.

At the crux of it from my perspective, Eddie writes:

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The Argument

In a study (this link is to a pdf copy) conducted by Robert Arnott and Clifford Asness and published in the Jan/Feb 2003 edition of the Financial Analysts Journal, which was studying dividend policy in regard to payout ratios, the authors constructed an index for stocks from 1871 to 2001 and determined that "the historical evidence strongly suggests that expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low." They went on to state that "our evidence thus contradicts the views of many who believe that substantial reinvestment of retained earnings will fuel faster future earnings growth."

Follow up studies were conducted in 2005 and 2006 in foreign markets, including Canadian, Australian, Japanese and European markets, and confirmed the conclusion reached by the Arnott/Asness study that higher dividend payments actually lead to higher earnings. And dividends help drive higher market prices. In the book "The Intelligent Investor" by Benjamin Graham, it states "Analytical studies have shown that in the typical case a dollar paid out in dividends had as much as four times the positive effect on market price as had a dollar of undistributed earnings."

Other studies, such as one conducted by Zhou and Ruland titled "Dividend Payout and Future Earnings Growth," and published in the Financial Analysts Journal, May/June 2006, have demonstrated that companies with a high dividend payout record tend to exhibit strong earnings growth. Those same companies have also exhibited a tendency to provide better returns to investors over time. As this link shows (Page 4), dividend growth companies outperformed non-dividend paying companies by 8.7% per year over a recent 30-year period. Why is that? It's believed to be that companies that pay dividends are, in general, better managers of capital and are more disciplined.

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And he writes more about relative goals and perspective.

Of course, as always with an article on Seeking Alpha, taking a controversial opinion, even when backed by multiple independently published research articles, is bound to stir up some comments. Read them. Who knows, you may find the key that helps you become a better investor.