Since this question was brought up a couple of weeks ago it seems to have polarised a lot of opinion. Everyone has their favourite style of investing and many value investors don’t even care about whether or not a stock pays a dividend. While most do begrudgingly concede that a cash return is nice to have, the idea that dividend paying stocks may have some kind of edge over other investments leads to a sharpening of swords. Where there’s smoke there’s fire, so I thought I’d do a bit of hunting and try to generate enough research links to stoke up it up a bit.
World stock markets have unquestionably been in a long term secular bear market for the last dozen years. As discussed last week, these can be classified as ‘sideways markets’ characterised by the gradual decline of P/E ratios from the great highs achieved at the end of bull markets (such as seen at the peak of the internet bubble in 2000) to the extreme lows many years later. This long term process can take up to 20 years and needs to be thought of as distinct from the more dramatic but cyclical bull and bear swings that occur over the shorter spans in between. Buying and holding stocks can be fraught with danger in such an environment especially as the emotional impact tends to encourage selling and buying at the wrong parts of the cycle. But the relative stability, lower volatility and consistent cash returns of good quality dividend paying stocks do seem to provide a cushion against market falls and may help investors weather the worst of bad times, and even forge a good profit.
1. Dividends provide the majority of the return in bear markets
In his book Active Value Investing, Vitaliy Katsenelson illustrates that between 1900 and 2000 the average annual return from the S&P 500 was 10.4%, out of which 5.5% could be explained by dividends. But these returns were extremely lumpy depending on whether the prevailing environment was a secular bear or a secular bull. He discovered that while in secular bull markets dividends accounted for only 19% of annual average stock market returns (the rest coming from capital growth), whereas in sideways markets they accounted for 90% of the returns. Given that Katsenelson predicts that the current secular bear market will continue on until 2020…
