Choosing Risk Over Dividends

One last piece of not-so-anecdotal evidence:  We have previously mentioned the relative outperformance of low quality stocks. What happens if we divide the perceived higher quality stocks (i.e., SPX) into dividend payers versus non-dividend payers?

In Q1, 2006, share prices for the 113 companies in the Standard & Poor’s 500-stock index that don’t provide dividends rose 8.58%.

And for the 387 that do? The quarterly gains were 5.45% — some 36% lower.

The WSJ adds:

"The figures indicate that, despite concerns like rising interest rates, slowing profit growth and high oil prices, investors are still bullish about the stock market and willing to accept greater potential volatility — rather than sticking with the tried-and-true dividend-paying shares — in the belief they will receive higher returns, analysts say."

That sanguinity in the face of significant concerns may be a sign of complacency.

Over the past few months, I have gotten into a debate with a variety of people — Rev Shark, Cody, Jim Cramer — as to whether or not there is anecdotal evidence of too much bullishness or bearishness. The example above copuld be interpreted as a sign of technology leadership, i.e., tech stocks typically don’t pay dividends.

The conclusion is that those with a bullish bend see too much bearishness, and those with a bearish perspective see too much bullishness.  That’s the nature of anecdotal evidence versus actual data points.

As mentioned last week, its a battle between two crowds: the “Wall
of Worry,”
and the “What, Me Worry?”


Stock Investors Choose Risk Over Dividends
WSJ, April 15, 2006; Page B3

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Rusty commented on Apr 18

    Can any of this be explained, at least partially, as a result of tax policy? I know the dividend tax cut extension has been in jeopardy, and investors may have been behaving accordingly.

  2. vfoster commented on Apr 18

    after they initially passed the dividend tax cut, dividend stocks under performed non-dividend so i doubt it’s related to tax policy.. the dividend tax cut was more beneficial to the largest shareholders (insiders) who already own most of the stock. remember it was Chuck Schwab’s idea proposed at the economic summit in 2002 and he owns 12mm shares of SCHW.

    the chasing of risk is simply an extension of the reflation/now inflation trade that has been going on since the bottom in late ’02 and early ’03.. in the business week article noting the lagging of large caps, the top performing sectors over the last 5 years are all inflation sensitive.
    in this order: emerging mkts, gold, small caps, energy and commodities were the top performers.
    i’m guessing those were the top performers in Q1 as the inflation trade is still in play (obviously with metals and materials blowing thru highs).. the question is when will it shift? when the Fed gets the funds rate to a restrictive level (if ever) you will see these sectors break.

  3. Michael L. commented on Apr 18

    I think there are 2 parts to this.

    1) Take whatever the dividend yield for any particular stock, subtract what you believe the annual inflation rate is, and then apply your personal tax rate. Not much incentive to buy and hold a dividend payer.

    2) Compare to “risk free” yield of govt debt. Again if one wants interest, one can buy 20 or 30 yr bonds or CD’s with no risk to the principal except inflation.

  4. Andrew Schmitt commented on Apr 19

    Michael – you should do your own taxes. Dividends are taxed at a flat 15%.

    I like dividend payers because in general the management has a better apprecitation of shareholder rights, which leads to superior shareholder value and equity appreciation.

Posted Under