Don’t Focus on Dividends Alone

Dividends aren’t as important as they might appear.

Alex Bryan 10 August, 2017 | 11:00
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Dividends aren’t as important as they might appear. True, dividend payments can impose discipline on managers, making it harder for them to squander shareholders’ money on low-return pet projects. And yes, high-stocks have outpaced their lower-yielding counterparts over the long term, as shown in Exhibit 1. But there does not appear to be a causal relationship between dividends and returns.

170810 dividend(en) 01

Instead, this performance pattern can be explained by high dividend payers’ tendency to trade at lower valuations and exhibit less sensitivity to the business cycle than less-generous dividend payers. These characteristics have historically been associated with more-attractive performance independent of dividend policy. So dividends don’t tell the whole story. Focusing too narrowly on them can lead to trouble.

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About Author

Alex Bryan

Alex Bryan  is the Director of Passive Fund Research with Morningstar.

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