So I was browsing reddit and come across this thread:

and it got me thinking. The poster says this:

2) Where are the problems with investing money in moderate-paying low-expense dividend ETFs? I’m having a tough time finding much information on income investing in general, and dividend ETFs seem to be a bit of a rare breed. Most folks doing income investing seem to like picking individual stocks but I feel quite unsafe doing that.

(I understand my money will grow faster in Vanguard funds, but for me the psychological safety of taking safe gains on a continual basis helps me to sleep better at night.)

Any time people start assuming things about financials, I want to look at the details.

So I did.

There’s the first question, are dividend paying stocks really going to under-perform in terms of capital returns? It seems to me that it’s at least possible that companies can grow in stock price and throw out dividends. I took the Dividend Aristocrats as my benchmark since we are going to be comparing to an index like the S&P 500 anyways. The Dividend Aristocrats are the S&P 500 companies that have a history of raising dividends for decades. So I compiled the list, looked at the beta (volatility compared to their index) of the individual stocks and came up with this chart:

Dividend Aristocrats - Beta vs Yield

Dividend Aristocrats – Beta vs Yield

The horizontal bar at the beta = 1 level is the average volatility of the index.

The vertical line near the yield = 2%mark is the average yield of the index.

So stocks to the right of the vertical line are yielding more than the average S&P 500 member.

Stocks above the horizontal beta=1 line are more volatile than average, and those below are less volatile than average.

So, are dividend aristocrats going to underperform in capital gains?

Dividend Aristocrats - Beta Histogram

Dividend Aristocrats – Beta Histogram

Taking all the Aristocrats together, yes. The distribution of beta is skew right because of that peak around beta = 0.5.

So, the next question is: does that matter? Do the dividends compensate for the lower volatility?

To answer that, I looked up the historical returns of the Dividend Aristocrats. I got the performance from 1990 to 2011 from this seekingalpha article: (even though mean return is the wrong way to look at it) and then I calculated the returns from 2012-2014.

Over the period from 1990 to 2014, the S&P 500 had a compound annual growth rate (CAGR) is 9.64% which is slightly higher than the long term historical average of around 8.8%. Standard deviation for the series was 17.91%.

Over the same period, the Dividend Aristocrats had a CAGR of 11.77% and a standard deviation of 14.32%.

So the Dividend Aristocrats paid more money even with lower volatility.

What I’d be very interested in doing is expanding upon the Aristocrats and determining which are really worthwhile. You can see in the scatter plot that there are 11 stocks that either have exceptional yields and/or exceptional beta. I’d like to model a portfolio focusing on just those and leaving the stead-but-low-paying stocks out. My hypothesis is that this sub-index will substantially outperform both the full S&P and the Dividend Aristocrat indices.

One thought on “Is Dividend Investing Worth It?

  1. Love your last sentence about hiding earnings. So true! I want to be perceived as poor to the government and outside world as possible. You ve got the exact right idea I m trying to espouse. Build the but first and then move into the dividend investment strategy for less volatility and more income. Not the other way around.

Leave a Reply

Your email address will not be published. Required fields are marked *