5 Facts About Dividend Investing That Will Make You ReThink How You Invest

5 Facts About Dividend Investing That Will Make You ReThink How You Invest

Hey All! This is actually the first guest post that I am hosting on Family Faith Finance! It is a guest contribution by Nick McCullum from Sure Dividend. This piece should bring some new and interesting insights on dividend investing. Enjoy!


Dividend investing – buying companies with strong prospects of growing their dividends over time – is one of the best ways to build long-term wealth.

This investment strategy has a healthy combination of:

  • Strong risk-adjusted returns
  • Ease of implementation
  • Minimal time commitments (for buy-and-hold investors, at least)

These are significant claims.

And, extraordinary claims require extraordinary evidence.

This article will provide 5 facts about dividend investing that will make you rethink how you invest. Each fact will provide evidence on how dividend investing has either improved returns or reduced risk (or both) over meaningful periods of time.

Fact #1: The Risk-Adjusted Outperformance of the Dividend Aristocrats

The Dividend Aristocrats are an elite group of dividend stocks with 25+ years of consecutive dividend increases. You can see the full list of all 51 Dividend Aristocrats here.

The Dividend Aristocrats have a proven history of steadily increasing their dividend payments, making them appealing investments for dividend growth investors.

The reason for their long dividend histories can be found by examining the competitive positioning of each individual business. Typically, the Dividend Aristocrats have enduring competitive advantages which allow them to grow through the booms and busts of the business cycle.

Because of this, the Dividend Aristocrats have historically outperformed the broader stock market as measured by the S&P 500.

Source: S&P Dividend Aristocrats Fact Sheet

Over the past 10 years, the Dividend Aristocrats have delivered higher returns than the S&P 500 Index while also generating less portfolio volatility.

While today’s Dividend Aristocrats are a slightly different group of stocks than those from 10 years ago, the likelihood of this trend repeating itself is very high.

All else being equal, a business that has been profitable through many economic cycles is more likely to continue growing than an upstart, new market entrant.

Accordingly, the Dividend Aristocrats are one of the best resources for identifying high-quality dividend stocks suitable for long-term investment.

Fact #2: The Basket of High Yield Dividend Stocks Outperforms

One of the most important metrics for dividend growth investors is dividend yield, which shows – as a percentage – how much dividend income is generate for each dollar invested in a particular stock.

Importantly, dividend yield is correlated with total returns.

Over a very long period of time (January 1928 to December 2016), Heartland Advisors stratified the stock market into 5 dividend yield quintiles and found that the 4th and 5th yield quintiles outperformed all other group of stocks (including those that do not pay dividends).

Source: Heartland Advisors – Dividends: A Review of Historical Returns

Significantly, the 5th yield quintile was not the best performer. The 4th yield quintile carries that honor.

This is because stocks with very high dividend yields (those in the 5th quintile) are often not retaining enough earnings to fund meaningful organic growth.

Looking at the performance of dividend stocks stratified by payout ratio confirms this. Over the past decade, it has been the third payout ratio quintile of dividend stocks (the middle quintile) that has delivered the best performance.

Source: Santa Barbara Asset Management

These data suggest that when looking for dividend stocks suitable for investment, those with above-average dividend yields with moderate payout ratios are the best options.

Fact #3: The Impact of Share Repurchases

Dividends are not the only method for a company to return capital to its shareholders.

Corporations can also repurchase company stock, which reduces the number of shares outstanding and improves important per-share financial metrics such as earnings-per-share, book-value-per-share, and free-cash-flow-per-share.

Unsurprisingly, the stock of companies that repurchase shares tend to have better performance than the stock of companies that do not repurchase shares.

This can be seen by comparing the performance of the S&P 500 Buyback Index (which contains the 100 stocks in the S&P 500 that repurchase the most shares) to the broader S&P 500 Index, which is shown below.

Source: S&P 500 Buyback Index Fact Sheet

Clearly, stocks that repurchase shares have meaningfully outperformed the broader stock market over the past decade.

So how can we use this knowledge to improve out investment returns?

Well, do not decide against investing in a high quality business just because it has a low dividend yield. It is highly possible that the company in question prefers to return capital to shareholders via share repurchases.

Apple (AAPL) is one example of this. In fiscal 2016, for example, Apple spent $12.1 billion on dividends and $29.7 billion on share repurchases. That’s right ­– Apple spent more than twice as much on share repurchases as it spent on dividends.

Keep this in mind when you encounter an appealing investment with a low dividend yield – the company might be devoting substantial capital to reducing its number of shares outstanding.

Fact #4: There Are Typically More Dividend Growers Than Cutters

In the introduction to this article, I made the bold claim that dividend growth investing is an investment strategy that is relatively easy to implement.

One of the reasons for this is that there is typically many more stocks that are growing their dividend than stocks that are cutting their dividend. The following diagram clearly displays this trend.

Source: Santa Barbara Asset Management

Even in the worst of the Great Recession of 2007-2009 (one of the worst recessions of our time), there were still more S&P 500 companies that were growing their dividend than those that were cutting their dividend.

This suggests that even in the worst of economic environments, there are still plenty of investment opportunities for dividend growth investors.

Fact #5: Dividend Growth Stocks Have Outperformed With Less Risk

Traditional financial market theory suggests that in order to generate greater investment returns, an investor must assume additional risk.

In a truly efficient market, this could be true. This is not the case in practice.

Dividend stocks show that investors can generate above-average returns with below-average risk (as measured by volatility).

The following scatterplot displays the returns and standard deviations of various subsets of stocks based on their dividend history.

Source: Santa Barbara Asset Management

Dividend growth stocks (called Dividend Growers & Initiators in the scatterplot) have delivered the best returns with the least risk compared to all other types of stocks grouped by dividend history.

This indicates that dividend growth investing is a fantastic risk-adjusted strategy to deliver outsized investment returns.

Final Thoughts

At Sure Dividend, we are firm believers in the merits of dividend growth investing.

But don’t blindly take our word on it – there is plenty of academic investing that shows that dividend growth investing works.

This article provided 5 facts about dividend investing that will make you rethink how you invest.

For new dividend growth investors, the evidence provided in this article is a great place to begin your journey. For seasoned investors, I hope this was an informative piece and can help you improve your existing skills.

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