The History of High Dividend Stock Performance

By on October 23, 2010

Investing in stocks with high dividends is very popular currently with interest rates plunging to new lows. InsiderMonkey, “The Smartest Monkey on Wall Street,” looks at the history of stocks paying high dividends compared to the broader market. Over the long term (1927 to 2009) they found that high dividend stocks outperformed the market by an average of 1.36 percentage points per year. This may seem small, but it doubles the money returned by the broader market over such a long timeframe.

However, there have been long stretches where high dividend stocks underperformed the general market:

It’s not like dividend stocks beat the broader market by 1.36 percentage points year in and year out. The results vary wildly from year to year. For example, during the 10 year period between 1927 and 1936, dividend stocks underperformed the market by an average of 4.8% and returned less than the broader market in 9 out of 10 years. If there were some dividend stock investors in 1927, they probably would have abandoned this strategy by 1936. During the following 15 years, dividend stocks managed to beat the broader market in 13 out of 15 years and the average outperformance was 5.0%. A complete reversal. Basically, if we exclude the first 10 years, we could say that dividend stocks beat the stock market by 2.2 percentage points on “average”.

High dividend stocks performed much worse than the broader market between 1987 and 1999, underperforming by 7.7 percentage points per year. In 11 out of the 13 years, dividend stocks also returned less than the stock market. This may be the reason why dividend stocks were out of favor at the peak of the dot-com bubble and outperformed the broader market by an average of 10.2% per year during the past decade. Dividend stocks managed to beat the stock market in 9 out of the last 10 years.

InsiderMonkey concludes that the high dividend strategy works best when interest rates are low and stay low for an extended period.

Source: InsiderMonkey
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