Hi, guys.
The nice folks at the Leuthold Group share a copy of Perception for the Professional, their research publication for paying clients, with me each month. About 60 pages of data analyses and reports. Jun Zhu this month wrote "Dividend Paying Strategies -- Which is Best?" and the findings are interesting.
Zhu notes that dividend-oriented strategies have been exceedingly popular, though many now fret that those stocks have been badly bid up. There's also a fear that dividend paying stocks lag when interest rates are rising. That turns out to be true, but not an investable insight: rate rising cycles tend to be triggered with little warning and last an average of nine months.
Even allowing for a lag during the 20% of months in which rates have risen, the strategy works well over time. Zhu writes "In the falling rate and neutral months, dividend paying stocks outperformed non-dividend paying stocks by a large margin. Regardless of interest rate changes, from 1927 to 2013, dividend paying stocks were the winner."
Zhu argues that there are at least four distinct dividend oriented (or dividend-oriented? Drmoran notes that I over-hyphenate. Overhyphenate? Over hyphenate?) strategies that manifest themselves in funds and ETFs. They are:
1. broad focus on dividend-paying stocks, which typically imposes simple size and liquidity requirements, then invests in dividend paying stocks.
2. high dividend-yield, which targets the highest-yielding stocks.
3. dividend growth, which requires consistent increases in payouts over 5-10 years.
4. quality dividends, which adds screens for the quality of the firm's financial strength and management. Those might include debt load, return on equity, earnings stability and dividend coverage ratios.
Leuthold tested those strategies by looking at the performance of dividend oriented ETFs from 1989 - 2014. They admit that few of the ETFs represent pure instances on one strategy of another, but most are strongly aligned with one of them.
They found (1) the dividend strategies as a group substantially outperformed the S&P500 (12.2% annually versus 9.0%) with lower volatility (4.2% S.D. versus 4.3%), (2) that "companies which have raised dividends for 10 consecutive years are actualy the worst performers" and (3) the quality dividend strategy blew away the competition on returns without incurring heightened volatility.
Quality dividend ETFs returned 14% annually with 4.1% S.D. The other three strategies clustered between 10.9% - 12.2% returns with S.D.s of 4.0 - 4.5%.
Charles might be the one to ponder about the mutual fund implications of the research, since fund managers add the overlap of relative value and absolute value orientations. As I think about the funds we've profiled, Guinness Atkinson Inflation Managed Dividend (GAINX) strikes me as a quality dividend / relative value bunch while Beck, Mack and Oliver Partners (BMPEX) would qualify as quality dividend / absolute value.
Leuthold's list of "quality" ETFs includes:
Schwab US Dividend Equity (SCHD)
iShares High Dividend Equity (HDV)
FlexShares Quality Dividend Index (QDF)
First Trust Value Line Dividend (FVD)
WisdomTree US Dividend Growth (DGRW)
FlexShares Quality Dividend Dynamic Index (QDYN, with the note this is a higher beta product)
FlexShares Quality Dividend Defensive Index (QDEF, lower beta).
For what interest it holds,
David
Comments
Also, did the review not consider the "dividend capture" strategy, that arose in some funds--- to one degree or another--- in the mid-2000s? That worked well until the financial crisis of 2008/9; thereafter... not so well would be putting it mildly.