There Is Nothing Special About Dividends

Moreover,
historical
evidence
supports
this
theory
–
stocks
with
the
same
exposure
to
common
factors
(such
as
size,
value,
momentum,
and
profitability/quality)
have
the
same
returns
whether
or
not
they
pay
a
dividend.
Yet,
many
investors
ignore
this
information
and
express
a
preference
for
dividend-paying
stocks.

Dividend
Aristocrats

One
popular
dividend
strategy
is
to
invest
in
the
“dividend
aristocrats”.
For
example,
the
S&P
500
Dividend
Aristocrats
measures
the
performance
of
S&P
500
companies
that
have
increased
dividends
for
the
last
25
consecutive
years.
And
there
is
an
exchange-traded
fund
based
on
that
index,
the
ProShares
S&P
500
Dividend
Aristocrats NOBL.
In
a
January
2019
blog
post
titled
“Dividend
Growth
Strategies
and
Downside
Protection,”
S&P’s
Phillip
Brzenk,
global
head
of
multi-asset
indexes,
examined
the
performance
of
dividend
growth
strategies,
specifically
during
periods
of
negative
market
performance.

He
found:
“Since
year-end
1989,
there
have
been
six
calendar
years
of
negative
performance
for
the
S&P
500 –
and
in
all
six
years,
the
S&P
500
Dividend
Aristocrats
outperformed
the
equity
benchmark
by
an
average
of
13.28%.
In
fact,
the
S&P
500
Dividend
Aristocrats
produced
a
positive
total
return
in
three
of
those
years.”

Examining
the
performance
on
a
monthly
basis,
he
found:
“The
S&P
500
Dividend
Aristocrats
outperformed
the
S&P
500
53%
of
the
time,
by
an
average
of
0.16%.
When
isolated
to
down
markets,
the
S&P
500
Dividend
Aristocrats
outperformed
over
70%
of
the
time
and
by
an
average
of
1.13%.
In
up
markets,
the
S&P
500
Dividend
Aristocrats
underperformed
56%
of
the
time,
but
at
a
lower
average
magnitude
(-0.34%).
This
shows
that
the
S&P
500
Dividend
Aristocrats
has
delivered
downside
protection
in
months
when
the
S&P
500
lost
ground.”
Of
course,
markets
tend
to
be
up
more
than
they
are
down,
so
an
advantage
in
down
markets
doesn’t
necessarily
translate
into
an
advantage
overall.

Swedroe:
Game
Over
for
Hard-to-Borrow
Stocks?

Brzenk
also
found
that
“the
lower
the
return
of
the
S&P
500,
the
better
the
relative
performance
was
for
the
S&P
500
Dividend
Aristocrats.
We
see
the
batting
average
was
typically
better
for
the
more
negative
months
than
the
less
negative
months.

“Additionally,
we
observe
that
the
average
excess
return
over
the
S&P
500
was
higher
in
the
most
negative
months.
Since
1989,
the
S&P
500
has
lost
5%
or
more
in
31
out
of
348
months
(~9%
of
the
time).
In
these
months,
the
average
excess
return
for
the
S&P
500
Dividend
Aristocrats
was
2.46%,
with
a
hit
rate
of
81%.
The
median
excess
return
was
of
similar
magnitude
(2.32%);
therefore,
the
results
were
not
skewed
by
only
a
few
months –
rather,
there
was
consistent
outperformance.”

Is
It
Dividends
or
the
Quality
Factor?

The
evidence
seems
to
conflict
with
financial
theory
that
says
dividends
don’t
matter,
which
raises
the
question
of
whether
a
focus
on
dividend
growth
adds
value,
especially
in
down
markets:
is
there
something
unique
about
companies
with
growing
dividends?
Or
can
the
returns
of
the
stocks
with
growing
dividends
be
explained
by
exposure
to
common
factors
that
have
been
found
to
explain
the
vast
majority
of
equity
returns –
market
beta,
size,
value,
momentum,
and
quality?
In
other
words,
do
companies
with
the
same
exposure
to
these
factors
have
the
same
performance
whether
or
not
they
have
growing
dividends
or
even
pay
dividends
at
all?

To
answer
the
question,
I’ll
examine
the
performance
of
the
two
largest
dividend-growth
ETFs
(with
a
total
of
more
than
$89
billion
in
assets)
demonstrating
that
investors
believe
the
strategy
adds
value.
I
used
the
regression
tool
available
at Portfolio
Visualizer.
The
table
below
shows
the
loadings
(how
much
exposure
the
funds
have
to
each
factor)
as
well
as
the
funds’
annual
alpha.

What
do
we
learn
from
the
above
data?
First,
the
high
R-squareds
(especially
in
the
case
of
Vanguard
Dividend
Appreciation VIG)
demonstrate
that
the
returns
of
the
two
funds
are
well
explained
by
their
exposure
to
these
well-documented
common
factors.
Second,
some
of
the
outperformance
in
down
markets
is
explained
by
the
fact
that
the
market
betas
of
the
two
funds
are
below
1 –
they
have
less
exposure
to
market
beta
than
the
market
does.
Third,
the
funds
also
have
negative
exposure
to
the
size
factor –
their
holdings
are
larger
than
those
of
the
market.
And
large
stocks
tend
to
outperform
riskier
small
stocks
in
bear
markets.
Fourth,
the
two
funds
have
large
and
highly
statistically
significant
(t-stat
of
at
least
5)
exposure
to
the
quality
factor.
Quality
stocks
are
“defensive,”
tending
to
outperform
in
down
markets.
And
finally,
and
perhaps
most
importantly,
the
two
ETFs
both
have
economically
significant
negative
alphas
(negative
1.89%
for
NOBL
and
negative
0.94%
for
VIG),
far
greater
than
their
expense
ratios.
That
means
the
funds
were
subtracting
value,
not
adding
value.

The
evidence
is
consistent
with
economic
theory:
there
is
nothing
special
about
dividends,
with
the
returns
of
dividend-paying
stocks
well
explained
by
exposure
to
common
factors.
Dividends
are
neither
positive
nor
negative,
at
least
from
a
pretax
perspective.
For
taxable
investors,
dividends
have
negative
implications
relative
to
share
repurchases.
In
addition,
a
focus
on
dividends
reduces
diversification
because
about
60%
of
US
stocks
and
about
40%
of
international
stocks
don’t
pay
dividends.

Thus,
any
screen
that
includes
dividends
results
in
portfolios
that
are
far
less
diversified
than
they
would
be
if
dividends
were
not
included
in
the
portfolio
design.
Less-diversified
portfolios
are
less
efficient
because
they
have
a
higher
potential
dispersion
of
returns
without
any
compensation
in
the
form
of
higher
expected
returns
(assuming
the
exposure
to
common
factors
is
the
same).
And
finally,
a
focus
on
dividends
often
leads
to
investing
in
US
equities,
creating
a
home-country
bias
and
a
less
diversified
portfolio.

Swedroe:
What’s
Unique
About
Private
Equity?

The
bottom
line
is
that
dividend-growth
strategies
are
basically
quality
strategies.
The
good
news
about
the
quality
factor
is
that
the
premium
(about
4.8%
a
year
since
1958)
has
been
persistent
and
pervasive
around
the
globe.
However,
there
are
no
generally
accepted,
logical,
risk-based
explanations
for
the
quality
premium
because
quality
stocks
are,
by
definition,
safer
investments.
And
safer
investments
should
have
lower
returns.

Thus,
the
quality
premium
is
a
behavioural
anomaly.
And
without
a
risk-based
explanation,
it’s
possible
that
the
premium
could
shrink
or
even
disappear,
especially
because
the
premium
has
become
well
known
since
the
publication
of
research
such
as
the
2013
studies
“Global
Return
Premiums
on
Earnings
Quality,
Value,
and
Size”
and
“Buffett’s
Alpha”.
The
popularity
of
the
strategy
could
cause
the
trade
to
be
“crowded”,
driving
valuations
higher
and
expected
returns
lower.

Investor
Takeaways

First,
there
is
nothing
special
about
dividends
except
that
they
are
a
tax-inefficient
way
to
return
capital
to
shareholders,
and
they
are
certainly
not
income
(except
from
a
tax
perspective);
they
are
just
a
return
of
capital.
Second,
investors
are
better
served
by
focusing
on
investing
in
strategies
that
provide
exposure
to
the
factors
they
want
to
invest
in.
A
focus
on
dividends,
whether
dividend
growth
or
high-dividend
yield,
is
not
likely
to
add
value.

Larry
Swedroe
has
authored
or
co-authored
20
books
on
investing.
All
opinions
expressed
are
solely
his
opinions
and
do
not
reflect
the
opinions
of
Buckingham
Strategic
Wealth
or
its
affiliates.
This
information
is
provided
for
general
information
purposes
only
and
should
not
be
construed
as
financial,
tax
or
legal
advice.
Certain
information
is
based
on
third
party
data
and
may
become
outdated
or
otherwise
superseded
without
notice.
Third-party
information
is
deemed
reliable,
but
its
accuracy
and
completeness
are
not
guaranteed.
Mentions
of
specific
securities
are
for
informational
purposes
only.
Neither
the
Securities
and
Exchange
Commission
(SEC)
nor
any
other
federal
or
state
agency
have
approved,
determined
the
accuracy
or
adequacy
of
this
article.

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