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Role Of Dividends In Developed Stock Markets.

31 Jan. 2013

Dividends and dividend growth rate plays very important role in total returns of US stock market ( ). But can we say the same about non-US equity markets. IMO the following table 1 helps answer this question.

Table 1:

It should be noted that the authors created this table without taking dividend growth rates into account, so data show only the LOWEST limit of dividend participation in equity markets returns. Nevertheless, for countries like Australia, France and Spain return from dividends overweighed total return (i.e. stock prices declined) and, hence, the ratio of "Difference due to Dividends" to "Compound Return WITH Dividends" exceeds 1. Italy presents quite terrible situation when even "Compound Return with Dividends" was negative but of cause "Return FROM Dividends" was positive.

For other countries the ratio for relatively short period 1970-1995 (the panel A of the table 1) is in the range from ~21% for Japan to ~85% for Canada (average ratio for these countries is ~ 61%).

For long run (the panel B of the table1 and table 2) the ratio is higher (except UK) as expected from results I presented early (

Two periods with high and lower dividend importance (again with ignorance of dividend growth rate and hence at the lowest limit) are visible in table 2 for USA.

Table 2:

COUNTRY Short Period RATIO Long Period RATIO
Japan 1970-1995 0.214203    
Sweden 1970-1995 0.427759 1926-95 0.537167
Switzerland 1970-1995 0.465035 1921-95 0.61939
Norway 1970-1995 0.54063    
Austria 1970-1995 0.576687    
Denmark 1970-1995 0.585627 1923-95 0.868852
Netherlands 1970-1995 0.649321    
Belgium 1970-1995 0.687741    
Average 1970-1995 0.716695    
Germany 1970-1995 0.73913 1924-95 0.751553
United Kingdom 1970-1995 0.807512 1921-95 0.633578
Canada 1970-1995 0.85023    
United States 1970-1995 0.673171 1921-95 0.588808
United States 1970-1995 0.673171 1871-1920 0.950276

These results allow me to conclude that in the long run dividends are important not only for US but also for other developed markets.

Added 3/15/2013:

JAVIER ESTRADA shows in article "Fundamental Indexation and International Diversification" that dividend-weighted international portfolios outperform cap-weighted world index:

The DWI has higher return, lower volatility, and higher risk-adjusted return than the CWI. The EWI and DYWI have essentially the same volatility and beta as the DWI. For this reason, both the EWI and DYWI outperformed the DWI on a risk-adjusted basis.

DYWI out-performed the DWI in every non-overlapping 5-year period, every non-overlapping 10-year period.

The weights in the DYWI are substantially different from those in the CWI and DWI. Relative to the CWI, the DYWI gives a lower weight to Japan and the U.S. and a higher weight to all the other countries. Relative to the DWI, the DYWI gives a higher weight to 9 countries and a lower weight to the other 7 countries. Interestingly, the weights in the DYWI are even more evenly distributed than in the DWI. The standard deviation of the 16 average country weights in the DYWI is 1.8%, compared to standard deviations of 12.2% in the CWI and 3% in the DWI (in all cases around the average of 6.25%). DWI has an annual turnover of 13.3%. The EWI and DYWI have annual turnover rates of 13.7% and 24.8%, respectively.

The substantially different performance between the DWI and the CWI follows exclusively from the substantially different weights these indices give to each country benchmark. The countries with high (low) dividend yield tend to gain (lose) weight in this index. For example, the weight of Japan, the country with the lowest average dividend yield, in the DWI is decreased by 88% with respect to the CWI. Conversely, the weight of Ireland, the country with the third highest average dividend yield, in the DWI is increased by 40 times, again with respect to the CWI.