M* Dividend Investor newsletter.
This month's M* Dividend Investor Newsletter had very good article about dividend investing. This is snippet of the cover article. My apologies for the formatting. You can read the whole thing
here and sign up for a free trail.
Given the various practical advantages associated
with dividends, it would not be unreasonable for
equity investors to accept lower total returns than the
market average in order to get them. However, history
tells a different story: The aggregated virtues of high yielding
stocks have led them to outperform low- and
no-yield stocks over time.
Though this observation has been demonstrated in
numerous academic studies, lately I’ve started
to evaluating raw data myself. Among the data sets
made available by Dartmouth professor Kenneth R.
French (best known for the Fama-French asset
pricing model) are returns for U.S. stocks based on
their dividend yields at one-year intervals. This
treasure trove of data and many others is available
free at
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html,
and I’m still coming up with ways to evaluate the past performance
of dividend-paying stocks. But it’s not too early
to share a few of the strongest conclusions
Invested at the average return of the U.S. stock
market, a dollar at the end of 1927 became $3,013 by
the end of 2014—an average annualized return of
9.6% a year. That in itself isn’t surprising, but those
who consider dividends the province of has-beens
should note the positive relationship between relative to the standard deviation of returns—provides
a good yardstick for considering risk-adjusted performance.
The higher the Sharpe ratio, the higher the
return that is earned relative to the volatility involved.
Exhibit 2: Returns and Risk by Yield
Column 1 Total Return Percentage
Column 2 Standard Deviation %
Column 3 Sharpe Ratio
Entire Market 9.6 18.8 0.33 |
Non-Payers 8.5 30.1 0.17 |
Lowest 30% 9.1 19.8 0.28 |
Middle 40% 10.4 17.9 0.38 |
Highest 30% 11.1 20.0 0.38 |
Quintiles by Yield |
Lowest (non-zero) 9.1 20.6 0.27 |
Quintile 2 10.0 18.4 0.35 |
Quintile 3 9.7 18.7 0.33 |
Quintile 4 11.6 18.7 0.44 |
Highest Yields 10.9 20.9 0.35 |
*Monthly data from Dec. 1927 through Dec. 2014. Total returns and standard deviations are annualized. Source: Kenneth R. French, Morningstar analysis.
Here we see that the highest 30% of stocks by yield
provides higher total returns than the middle 40%,
the middle beats the lowest 30%, and all the dividend
payers top the nonpayers—a slightly expanded
version of the outcomes graphed in Exhibit 1. The
nonpayers also had the highest standard deviation of
returns, which isn’t much of a surprise. However, the
highest yielders also have a standard deviation (20.0%
annualized) that is slightly above the market average.
The Sharpe ratio suggests this additional volatility
is worth taking, but the least volatile segment—the
middle 40% of yields—offers a similar risk/reward
trade-off (a lower annualized return than the high
yielders, but less volatility too).
There is a bunch more info for the data loving folks. For the rest of us dividends mean higher returns and less volatility. If you are in the accumulation phase the lower volatility may not be that important in the withdrawal phase I think it is very important.
So what about DVY and other dividend oriented funds. I guess my answer is that aren't particularly good funds. For instance, I've never understand the rational for DVY.
To me a far better dividend fund is Wellington.
The M* dividend investor newsletter has been around for 10 years and the real money portfolio is up 1.8% per (as of Jan 2015) over the S&P more importantly the Beta of the portfolio is .73. My portfolio (which relies heavily on Josh Peter picks) has had similar performance. Despite the drag of my large Intel holding.