Do dividends guarantee performance?
There’s a lot to like about dividends. Companies that distribute a significant portion of their earnings to shareholders via dividends have a disciplined check on management no to waste cash, to grow their businesses organically, and to make sure that growth is sustainable. Dividends are fully transparent: no matter what other financial gimmickry a firm may use, it can’t lie about what it pays out to its owners.
Companies that overextend themselves and cut their dividends get punished by the market, and often those managers lose their jobs. These are some of the reasons consistent dividend-payers have outperformed the general market over the long term.
But there are times when dividend-paying stocks underperform as well. When interest rates rise, bond yields appeal to income-oriented investors, and many of them reduce their holdings of dividend-paying stocks in order to buy bonds. After all, bonds are a senior claim on a company; they’re less risky. Since 1980, when 10-year yields were rising, high dividend-yielding stocks underperformed the general market seven out of ten time periods.
Dividends aren’t magic. A lot of factors go into outperformance. Since everyone seems to love dividends now, it makes sense to look at lots of ways to find value.
Douglas R. Tengdin, CFA
Chief Investment Officer