FYI: Dividend strategies have drawn increasing interest from investors around the world as central banks have pursued both quantitative and qualitative easy monetary policies, keeping interest rates at what have been exceptionally low levels since 2008.
But this preference isn’t entirely new; it has long been known many investors have a preference for cash dividends. From the perspective of classical financial theory, this behavior is an anomaly.
It’s an anomaly because dividend policy should be irrelevant to stock returns, as Merton Miller and Franco Modigliani famously established in their 1961 paper “Dividend Policy, Growth, and the Valuation of Shares.”
Regards,
Ted
http://www.etf.com/sections/index-investor-corner/swedroe-vanguard-debunks-dividend-myth?nopaging=1
Comments
Something I agree with. In the 90s, I walked into a Dreyfus office, and commented that I didn't see a difference between growth funds and growth & income funds (the latter placing some emphasis on dividends). The response was "someday you will". It's some day, and I still don't. A buck of total return is still a buck.
It's a matter of cause and effect. A company paying or not paying a dividend doesn't make it different, but because a company is different (e.g. cash cow business vs. high tech) it may be more likely to pay a dividend.
I tried posting a similar comment on ETF.com more than a day ago. It's a moderated site that apparently doesn't appreciate comments on this column (there are none as of now). FWIW, here's what I tried to post:
"Less diversified portfolios are less efficient because they have a higher potential dispersion of returns without any compensation in the form of higher forward-looking return expectations (__assuming the exposure to investment factors are the same__)."
But they're not the same in the case of dividend growth ("lower volatility and [higher] quality") and high dividend ("value and lower volatility") strategies. In fact, with coefficients of correlation at 89% and 95%, these strategies function pretty well as proxies for those different investment factors.
Whether one wants to emphasize those particular factors is a different question. Personally, I've always looked for total return, regardless of whether a fund was growth oriented, equity income focused, whatever. But if you want to say that high dividend funds don't reward investors, it seems you also have to say that there hasn't been a value premium in the market (and houses like DFA have simply been lucky).