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In their 1961 paper, “Dividend Policy Growth and the Valuation of Shares,” Merton Miller (1990 Nobel Prize) and Franco Modigliani (1985 Nobel Prize) famously established that dividends are irrelevant relevant to stock returns. In the intervening 58 years, the Modigliani-Miller theorem has not faced a serious challenge in the academic literature.
Yet even today in 2019 some people want to single out divided paying stocks (or ETFs or MFs) as somehow being better than non-dividend paying stocks or ETFs or MFs.). There even is a thread asking for advice on low risk high dividend stocks... and people are actually making recommendations!
In more recent times, a 2007 paper titled “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing,” the authors evaluated ALL stock returns and dividend yields over the 31 year period from 1972 through 2003 and found dividends and dividend yield do a very poor job of predicting future returns. Several other studies confirm these results.
Dividends do not matter.
Vanguard has a popular Dividend Appreciation ETF (VIG). Data are available since 2006 ($49.24) through today ($118.24)
Not a bad return. HOWEVER all of its returns are explained by other factors regardless of dividend policy. The other factors that account for those returns are market beta, size, value, and quality.
Both theory and actual quantitative evidence show dividends are irrelevant.
So why do people still look for dividend paying stocks?
found dividends and dividend yield do a very poor job of predicting future returns.
Vanguard has a popular Dividend Appreciation ETF (VIG). Data are available since 2006 ($49.24) through today ($118.24)
What are we talking about here? The actual increase in the worth of the stock or the actual increase in the dividend?
Because there are numerous examples of dividend paying stocks that have a predictable history of increasing growth and dividend payout, and many have utilized this data to build portfolios that return sizable dividend income that they use to supplement their retirement accounts (401k, Roth, Pension, etc).
I doubt most look at a dividend yield of some random stock and think "Wow, my future returns will be high/low based on this yield", that's not how your average dividend income seeker thinks. Most are looking for long term stability, history of payouts, and potential income from building a sizable dividend based portfolio. These are not your day trader flippers.
Far too many people misunderstand dividends and often times overvalue them but VIG has outperformed SPY since its 2006 inception dividends reinvested or not. both returns are over 200% reinvesting
You need to pay more attention to current market environment and events to understand what is going on.
Cost of financing the dividend declines in a period where investors anticipate central banks will lower interest rates. The dividend-paying stocks have had a big jump in the last two months.
Utilities have been outperforming the Dow and the S&P 500 for twenty years. Long-term interest rates have dropped from six percent to zero during that time.
Dividends are going to be heard about more and more as yields move negative and growth continues to fall. GDP is coming in at 1.3% despite heavy government deficits.
When you hit low growth and low or negative yields it changes things. High multiples right now are justified by growth. No growth and multiples will drop. Remove the high flying growth stock multiples everyone is piled into right now and what happens?
We have a lot of people and funds chasing the same things right now. If growth falters, which it already is and yields go lower a lot of folks are going to be scratching their heads. I'll tell you one thing, dividends might look really ****ing good with a US10Y at 50 basis or lower and GDP hovering sub .5% or lower.
One more thing DCF says lower discount rates means higher multiples. In a vacuum sure but growth is far more important in the calculations and the second growth even hints at slowing these high multiples will come down. The discount rates aren't nearly as important.
Dividends are going to be heard about more and more as yields move negative and growth continues to fall. GDP is coming in at 1.3% despite heavy government deficits.
When you hit low growth and low or negative yields it changes things. High multiples right now are justified by growth. No growth and multiples will drop. Remove the high flying growth stock multiples everyone is piled into right now and what happens?
We have a lot of people and funds chasing the same things right now. If growth falters, which it already is and yields go lower a lot of folks are going to be scratching their heads. I'll tell you one thing, dividends might look really ****ing good with a US10Y at 50 basis or lower and GDP hovering sub .5% or lower.
One more thing DCF says lower discount rates means higher multiples. In a vacuum sure but growth is far more important in the calculations and the second growth even hints at slowing these high multiples will come down. There discount rates aren't nearly as important.
Interesting times.
Even in times of low or negative yields dividends don’t mean crap if you have no real return or worse your equity/fund etc is actually down
First, let me point out that I am certainly no dividend groupie. IMO, there is nothing more appealing than the possibility of owning shares in a company that can reinvest all of its free cash flow at a high rate of return for ten, twenty years or longer. That company can multiply one's original investment many times with no tax consequence until the choice is made to sell shares.
With that disclaimer out of the way, and with apologies to the Nobel committee... empirical studies have shown that non-payers as a group have given smaller total returns than dividend payers. There are several possible explanations for this, but in any event the numbers do speak for themselves. Anyone with an internet connection and an eighth-grade education can find this information.
There used to be a belief that paying a rising dividend was a sign of good financial health and investors liked that . So these dividend payers tended to outperform ... then one by one most did just as stupid things with their money , they failed to live up to expectations and that belief went away .
100% of the Dow and 80% of the s&p pay dividends . At times large caps do better and at times mid and small caps do better . It is hard to find many large caps that don’t pay dividends . So it is hard to own a diversified mix of large caps without owning dividend payers
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